I'm looking at starting my own microbrewery and I have a question regarding financing. I presently have approx. 80% (in cash/bonds) of the loan sum and I want to know how to protect the portion that I am not giving as collateral.
Example: I need (all theoritical numbers) $100,000 and presently have $80,000 in cash/bonds. I only want to put up the standard 20% as collateral and want to "protect" the remaining $60,000.
Is this regulated in the promissory note? Any help/tips are appreciated.
#1. "RE: Protecting my equity" In response to Reply # 0
Huh? If you are borrowing money, there is no equity involved to worry about. If you borrow the rest of the money you need, you don't give up equity, you just must qualify for the loan and keep 100% of your equity.
If you are dealing with a lender who wants equity and payment of interest and principal, run like hell because they are going to cheat you.
#2. "RE: Protecting my equity" In response to Reply # 1
Maybe I didn't phrase my question correctly.
My thoughts are, that I don't want to jepordize all of my cash. Here an example, using fake numbers, but in similar proportions:
I want to borrow $150,000 to start my own biz. I am willing to invest my 20% of this sum ($30,000) but I don't want the bank/lending instition to get their hands on my remaining $70,000, which I have stored in cash/stocks. I understand that I will have to give them a personal guarantee, but can I cap this sum? Can I say, "ok, if I go bust, you guys get $20,000 of my securities" or am I "all in"??
#3. "RE: Protecting my equity" In response to Reply # 2
Ah! Well the problem is if you hide that $70k from the bank when you apply, you are committing "bank fraud" and if you show it, it will improve your net worth (which is a benefit). You can try to get the bank to agree to not go after your $70k if you go bust and you won't have much chance of success, unless you have other assets that are worth more and are more liquid (hard to beat cash liquidity). One other option would be to shunt off the $70 somewhere else before you apply. In the stock world this is called a "nominee" or one who holds stocks for another. One caution with the cash portion and that is if the funds are coming from one place. What I mean is if you have a total of say $50k in cash and you use $20k for the loan and give $30k to some one else to hold for you, the bank may discover what you have done and that could be construed as fraud as well.
#5. "RE: Protecting my equity" In response to Reply # 4
Thing is, I want to be straight-up with the bank. No plans of fraud on this one. I was hoping that I could only go into a situation where one can draw the line as far as what is to be put up as collateral.
BTW: if I have $50,000, how much is the bank willing to give? My experiences in my business, in which we also loan money to customers, is that we generally need a 50% bank guarantee for the sum being loaned. (Answering my own question of $50 would mean that I would be able to take out $100 with no prob.)
#6. "RE: Protecting my equity" In response to Reply # 5
Banks don't give anything.
No one can predict at this point because you haven't asked them for a loan yet. You need to show them what you need with your application and business plan. The amont of money you really need to do your business is the critical question at this point. If you do your plan properly, your projections should "solve for the cash" need of your business. Once you know that number, then your money comes into play, i.e. with an SBA loan you need to have 20% equity (funds) in the business.
Let me show you what I mean, go to my site at http://www.capenerconsulting.com and follow the business plan link. Download the .pdf file of the DocImager business plan you'll find there and look at the projections. They are done according to GAAP (Generally Accepted Accounting Principles).
#7. "RE: Protecting my equity" In response to Reply # 6
Thanks for the help. I checked out your site - good stuff.
Let me try to re-phrase my situation/question: when I start the business as an S Corp, I still have to take a loan out and give the bank a personal guarantee. Can I put a limit on my personal guarantee, or can the bank liquidate me completely if I default on the loan???