Bank loan or private investors?

[reilly26]

I'm currently weighing my options for financing my startup. Does anyone have any thoughts as far as pros/cons for trying to get a bank loan (if possible) vs. taking money from family/friends as investors?
Also, does anyone have any recent experience with getting bank funding in the US? Thoughts?

[Trickster]

I recently started my brewery with a limited partnership. I went to 5 or 6 banks, all of which told me that I was one of the more prepared people to ever come into their office, but a brewery is just too high risk business for their tight asses right now.

Here is my suggestion. Use the banks as a refinement tool for your business plan. These guys know what they are talking about. Make your business plan with numbers for a bank (monthly payments to them), take it to some banks and see what they say and do a little more refinement. I started with national branches and worked my way down to the small local branches because I knew the national banks were a slim to none chance of giving funding. By the time you make it from regional banks down to local banks your plan will be much more refined to what a banker is wanting to see and you will have a higher probability of success, although probably still not great. At this point, if you are rejected by all banks you are sitting on a business plan that needs little changing for private investors and is so refined they will have a hard time turning you down.

The way my limited partnership is set up is the investors get 100% of the net profits until the note has been paid off. At that point I will receive 60% of the net profits and the investors will receive 40% of the net profits to be divided on a pro rata basis amonst themselves. You will want to make sure that you have a right of refusal on sale of shares so you investors can't sell back to AB without consulting you first. Get yourself a good lawyer and expect around $20K in set fees and SEC approval.

Cheers

[reilly26]

thanks for the advice

[Fennellys]

Also look in to your local chamber of commerce and also any local our county development groups. I was able to use partial funding from 2 different local development groups. The groups have government backed revolving loans available for certain percents of new businesses start up costs. With their partial funding I was able to get the local bank to step in for the other part of the funding.

I was also told that our business plan was one of the more complete plans they have seen in years. It included market analysis, statements of purpose, mission statements, sales forecasts for 5 years out broken down to per ticket sales, daily and monthly sales forecasts. I also had detailed spread sheets for every single item I needed to buy down to the exact count of 2x4's that would need to be bought. In my proposal I requested 100% financing and in turn I supplied 100% of the labor to renovate and build the place. With the insane amount of planning and paper work I had I was able to secure 100% financing I needed.

[fundingbrewers]

I totally agree with Fennellys, what you just described make all the difference in if the loan will even be considered, let alone approved. Being a commercial banker and specializing in SBA loans, I see many of packages and the ones that are well put together make a world of difference on turn around. I have actually financed 3 start-ups and two expansions, and really became an expert in brewery financing. I took the time to learn and understand the industry and how a brewery, works from to grain to keg. that makes a difference too, in the approval process, having a lender understand everything.

[nateo]

I was also told that our business plan was one of the more complete plans they have seen in years. It included market analysis, statements of purpose, mission statements, sales forecasts for 5 years out broken down to per ticket sales, daily and monthly sales forecasts.

^ A million times, that. I've seen a ton of really poorly-made business plans, and the people who made them can't figure out why no one will invest in their startup. If your business plan is good, you won't need friends and family to fund it.

I wouldn't waste my time going to major banks. A regional or local bank has a much bigger stake in the success of their community, so they're more likely to invest in you than Wells Fargo.

Something else to keep in mind: Debt is cheaper than equity (because interest on debt is an expense that decreases your tax liability, while equity is fully-taxed)