A restaurant owner approached me with an opportunity — and a financing problem.
His business partner wanted to leave the restaurant, and he had the opportunity to buy out his partner’s interest and become the sole owner. The restaurant was doing well, but he needed at least $75,000 to complete the buyout.
The obvious place to start was the bank. Unfortunately, conventional financing wasn’t an option.
Why couldn’t the bank help?
Like many business owners, the income shown on his tax returns didn’t fully reflect the cash flow of the business. That made it difficult to qualify for the additional financing he needed.
Borrowing against the equity in his home wasn’t straightforward either. His spouse had previously had a credit card go into collections, which had negatively affected her credit history.
There was also another significant challenge: the amount already owing on their home.
Their home was worth approximately $960,000, with an existing first mortgage of about $722,000. That meant they were already at roughly 75% loan-to-value (LTV) before borrowing another dollar.
For many private lenders, 75% to 80% LTV is around the upper end of what they are prepared to consider, depending on the property, location, borrower and overall strength of the application.
Adding another $75,000 would bring the total borrowing against the property to approximately 83% of its value.
So, while private lending was an option, this wasn’t necessarily an easy private lending deal either.
Finding a solution
After reviewing their financial situation, the property, the purpose of the funds and their plan for repaying the financing, I approached the private lending market to see whether a lender would consider the circumstances.
A lender was eventually found who was prepared to proceed.
The proposed financing was:
Loan amount: $87,500
Term: 1 year
Interest rate: 12% fixed
Lender and broker fees: $8,750
This was considerably more expensive than conventional bank financing due to all the challenges. As always, the cost needed to be weighed carefully against what the financing would accomplish.
In this case, the restaurant owner believed that buying out his partner and owning the business outright would leave him with a larger share of the restaurant’s future cash flow. His intention was to use the improved cash flow to repay the private financing rather than treat the private mortgage as a long-term solution.
After reviewing the costs and terms, he decided that proceeding made financial sense for him.
From proposal to funding
Once he decided to proceed, he signed the lender’s commitment letter. The lender’s lawyer then prepared the mortgage documents, and he obtained his own legal advice and completed the necessary paperwork through his lawyer.
Approximately 10 days later, the financing was completed and the funds were available for the partner buyout.
Why private lending made sense in this situation
Private lending isn’t intended to replace conventional bank financing when bank financing is readily available.
It can, however, provide a solution when a borrower has a legitimate financing need but doesn’t fit within conventional lending guidelines.
In this case, there were several obstacles: reported income that made conventional qualification difficult, a blemish on the spouse’s credit history, and a high loan-to-value ratio.
At the same time, there was real estate equity behind the loan, a specific purpose for the money, and a plan for repaying the financing.
That’s the type of situation where exploring private lending can make sense.
Details have been modified to protect client privacy. This example is for illustration only; private lending rates, fees and approval criteria vary by borrower, property, lender and general economic conditions.
