However, be careful if you have the sources to open the first location and plan to use coins flow from the primary one to open the second, third, and so forth. Remember, when you have coins inside the financial institution or fairness in your non-public assets, you can use that for running capital or expansions later. If you propose to depend upon business financing at any time, financing the primary one offers you the greatest flexibility, and that’s the downside of this Option.
Having your non-public money tied up in a commercial enterprise limits your flexibility in the future. You may also or might not be capable of taking advantage of a future possibility when it comes along. Many books discuss the fee for using OPM (Other People’s Money) in the opening and developing of a hit commercial enterprise.
Option II: Take out a loan secured with the aid of your personal property. This Option offers extra flexibility than Option I. Your belongings remain liquid, supplying you with the capability to respond as needed to convert enterprise requirements. The net after-tax difference between interest earned and interest paid may be low, making this a possible opportunity for Option I. The downside of this Option is available in forms: (1) tying up the non-public property you pledge as security and (2) the authentic, all-in price of the financing.
Tying up your private belongings limits your desire and versatility inside your destiny. For example, we recently funded a 2nd location for a sure franchisee. He had taken out an SBA loan for his first vicinity, using his domestic safety. He knew the lender changed into additionally filing a lien in opposition to his first region. Still, no person knew this would be trouble because we planned to secure our mortgage with the handiest in his new territory.
We discovered during the title seek that once the authentic lender filed their lien against the franchisee’s enterprise, they listed the location they have been financing and protected the word “all future locations” inside the lien submitting. Those three little words intended that all places this franchise could open at any time within the destiny have been considered security towards his unique mortgage!
We had been sooner or later capable of solving this but needed to negotiate a subordination settlement with the unique lender. The lesson here is to be very cautious about what the lender, in reality, makes use of as safety at the loan because it can restrict your alternatives in the destiny. In phrases of the authentic, all-in price of the financing, this will be a complicated problem. Unfortunately, some creditors like it that way.
They will quote a low-interest charge; however, they no longer need the points and mortgage costs involved. They won’t take some time to educate borrowers on the variations between variable price financing and stuck charge financing. They may not expose all the charges which might be incurred during the life of the mortgage.
