Collateral loan personal secured

When your business needs to grow, it's collateral that brings in the cash.

From Beverly Santilli's point of view, there's never been a better time to be a small-business lender. Santilli, 40, is president of American Business Credit Inc., a Bala Cynwyd, Pennsylvania, firm that's making loans to small businesses at the rate of more than $5 million per month. Loans by Santilli's firm are almost always backed by real estate, such as a home or business property. "Entrepreneurship is on the rise," she says, "and what these entrepreneurs are finding is that their home is their largest asset - and the key to unlocking loan financing."

Santilli ought to know. She started her business 10 years ago in her home with husband Tony Santilli, 54, a former banker with the venerable Philadelphia Savings Fund Society Meritor. Their enterprise has grown into a billion-dollar publicly traded behemoth called American Business Financial Services Inc. making small-business loans backed by the power of real property.

Although our society is saturated in media focusing on high-flying Internet deals and initial public offerings, the fact is, many businesses can't justify outside ownership by angels, institutional venture capitalists or the investing public. To get to a point where outside investment is appropriate, many businesses must initially rely on the financial resources of the people who believe most in their concepts, namely the founders themselves. "Any way you slice it," says Santilli, "a plain-vanilla loan is the way to go for the vast majority of small businesses."

REALITY CHECK

There isn't a lender on the face of the planet, however, that will lend money to your business without the reasonable prospect of getting it back. Enter the concept of collateral. For most people, a home is the best asset they have to collateralize. The catch is, once your home backs the loan, your home is what you could lose if your business fails to generate the necessary cash flow to make repayment.

"These kinds of loans aren't for everyone," says Santilli. "It's a bit of a high-wire act. They work best for entrepreneurs who have solid business ideas and the confidence to execute them."

In quickstep, here's how the process works. The difference between your home or business property's market value and what you owe on it is known as your "equity" in the property. Business lenders like Santilli will loan you money against that equity. Typically, she says, American Business Credit will lend an amount equivalent to 75 percent of the equity in your home, 50 percent of the equity in a business property or 65 percent against the value of a mixed-use property.

MAKING IT WORK

As a case in point, consider restaurateur Bob Alvino, who owns and operates the generically named but wildly popular Bob Alvino's Restaurant in Levittown, Pennsylvania. Each night at closing he would survey his domain with arms folded, pondering how he could configure his limited floor plan to accommodate larger parties.

The solution required more than just creativity; it required capital. As an added challenge, Alvino had just weathered a few lean years, so banks weren't exactly knocking at his door. Not that he didn't give them a try. "I went to three," he says, "one large and two small. The large bank didn't even want to see the place." Although Alvino had promising meetings with loan officers at the small banks, those bankers were ultimately unable to convince their loan committees that Alvino was worth the risk - despite his marinara sauce with a cult-like following.

Eventually, Alvino was referred to American Business Credit. "Bob Alvino and entrepreneurs like him are the backbone of this country," says Santilli, "and unlike many banks, we believe that because they have their entire life wrapped up in their businesses, they make the best customers to loan money to."

Assuming, of course, the numbers work out. And in Alvino's case, they did. In the end, American Business Credit paid off the original mortgage loan on the restaurant property, then made a new and larger loan to Alvino. This new loan was collateralized with the restaurant property, all the equipment, Alvino's home and a personal guarantee. The difference between Alvino's old loan and the new one went to Alvino, who used the proceeds to finance the expansion of his restaurant. Closing the deal took about four weeks.

5 STEPS TO A BETTER BUSINESS LOAN

If you think a business loan secured by your home or business property is appropriate for you, consider these pieces of advice before proceeding.

1. Grow up. Remember, lenders take collateral so it can be liquidated - sold off and turned into cash - in the event the business runs into trouble. Accordingly, don't put your biggest asset on the line unless you're confident you can make a go of it. Santilli says that as a lender, her modus operandi isn't to put people out of their homes. "We always take a lien on business assets and have been able to work out loans without ever touching people's homes," she says.

Santilli also advises staying in close touch with your lender. "We're small-business experts. If a business is having trouble, we want to hear about it first so we can help. When borrowers are responsive, we can work things out, which we prefer to do. When borrowers are unresponsive, that's when lenders enforce their collateral rights."

2. Dig deep. Unfortunately, small-business loans aren't cheap. "These loans are priced for the risk they carry," says Santilli. Remember, the so-called prime rate is the one lenders charge their best customers, those who borrow a lot of money and with whom there is very little risk. Small businesses, almost by definition, are on the other end of the spectrum. They don't borrow a lot of money, and there is a huge risk something will go wrong. Result: While the prime rate is something like 6 percent, small-business loans can carry rates north of 12 percent, plus points.

3. Use brokers judiciously. "Good loan brokers," says Santilli, "are worth their weight in gold because they can get [entrepreneurs] in front of motivated lenders who the borrower doesn't even know exist and, by doing so, dramatically compress the time to financing." The catalyzing effect, she says, can mean the difference between survival and extinction for some businesses.

Unfortunately, however, not all brokers are nearly so valuable. The absence of codified standards, as in the medical, law or accounting fields, means there is a wide variance in the quality of service. Basically, almost anyone can hang out a shingle and call themselves a loan broker. One red flag: high upfront fees. In Alvino's case, his broker asked for just a few hundred dollars to get started. "He said he wouldn't take on an assignment unless he was fairly sure he could place the loan, and his record speaks for itself," says Alvino. Another red flag: references that aren't given readily and where there's no success reported by the would-be borrower. There are no points for trying in the brokerage business.

4. Consider nonbank loan sources. The terms "bank" and "loan" have become so synonymous that like "FedEx" and "overnight delivery," businesspeople often don't consider other alternatives. Nonbank lenders like American Business Credit are more aggressive than banks and generally embrace the kinds of risks small businesses offer. In fact, Santilli says she frequently gets new customers as a result of banks' auditors deciding certain small-business loans don't fit the profile of what the banks want in their portfolios.

5. Borrow enough. When your home or business property is on the line, you want to make sure you borrow enough to make a reasonable go of your business expansion. Remodeling projects, such as Alvino's, are generally fraught with unanticipated costs. "Three thousand dollars here, $4,000 there, and before you know it, you can be $20,000 over, without the funds to make the necessary changes," says Alvino. This is another reason to consider nonbank capital sources. Banks sometimes lend less than a borrower really needs, handicapping the business expansion from the start.

Back at Bob Alvino's Restaurant, Alvino set his sights on completing his expansion by Mother's Day. When the holiday arrived, and Alvino accommodated his first party of 20, it was the crystallizing moment when he knew he did the right thing. "Sure, I took some risk," he says, "but the demand for larger parties was even stronger than I anticipated, and our numbers are already way ahead of what I projected."

David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business (Bloomberg Press). Call (800) 233-4830 for ordering information. He is a principal of Financial Communications Associates in Ardmore, Pennsylvania. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.