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September marked a milestone achievement for my business.  We finalized the purchase of the commercial warehouse space we occupy.  In some respect, I’ve achieved the American dream.  I own my own business, I own a piece of property/land, just missing the kids and the picket fence.  The process in whole took about 2 and a half years, I’ll do you a favor by condensing it down to a few paragraphs.

We first broached the subject of buying the building during renegotiations for extending our lease.  We quickly discovered that businesses under 2 years of age were consider high risk and carried significantly more down payment (read +20% down).  The journey truly took off the day after we turned 2 years old – about a year and a half ago.

There’s this tricky balance I’ve discovered with most big projects – money vs opportunity. Do you have the money to buy vs does the owner want to sell? Same can be said, for business acquisition, buying a home, etc.  It’s tricky but at some point – like everything – you just have to jump in.  We decided to approach the owner and start the conversation.  At the same time, we began approaching banks, stopping into 3 banks at the same time and speaking to their business lending departments.  I was quickly blown off by 2 of the banks.  It wasn’t that we didn’t qualify;  they just stopped returning phone calls and emails.  Hard to tell if it was bad business practices, they were lazy, or if they weren’t interested in the deal.  However, the third bank (Wells Fargo) quickly started pursuing me. I say pursuing, in retrospect I’d probably characterize it as selling.  An early lesson here is to truly appreciate that there is a lot of money to be made lending money.  It’s difficult to realize in the moment because you’re not even sure they’re going to lend you money at all, let alone lend it to you at a good term and rate.  Beggars can’t be choosers, given the same position it’s hard to say if I would have done anything different.

There were several challenges that emerged almost immediately: down payment amount, business income, and personal credit score.

Loans are products. There are different types and they come with different features.  We were exploring either a 7a or 504 loan.  Both types of loans are SBA backed loans.  They are specifically designed for small and new businesses.  You’ll notice the theme continued of finding support in the SBA and government.  Our initial micro-loan was a SBA loan, now we’re back again looking for a mortgage backed by the government.

The main difference between the two programs is what you’re allowed to use the money for.  The 504 loan is restricted to building purchase.  Meaning you can’t use the money for business operations, new equipment, payroll, etc.  The 7a loan can be used for nearly anything.

The banks are looking at a variety of variables to make their decisions.  I’ll talk quickly about 2 aspects that affected our circumstances the most – “debt to income ratio” and “loan to value“.  Debt to income ratio basically boils down to how much money are you making compared to how much you are going to have to pay back every month.  We had a compelling case because our projected mortgage was going to be substantially less than our current lease ($12000 a month compared to $7000 a month).  Basically they based our debt to income ratio off what we would be making as opposed to what we were making.

The loan to value looks at how much the building is worth (valued during the appraisal) verse how much they are lending you or willing to lend you.  In our case, the appraisal value was actually less than the negotiated sale price.  This affected the loan to value and caused us to come up with additional down payment.

In what ended up being about a 6 month process, my brother and I pressed hard to “make as much money as possible.” You’d think that a business should be doing this all the time, in truth there are so many different aspects of a business to focus on invariable different aspects get different priorities at different point in times.  For us, this meant an emphasis on collections, sales, and events.

*During the course of writing this post, it got so long, that I thought it best to separate into 3 parts.