Business Profits + Owner’s Pay + Business Loan Issue
I own a business with revenues of approximately $550k/yr. I have owned this business for only 5 months. Net profits as an absentee owner are approximately $60k/yr. If I, the owner, acted as the Gen Mgr the total net profits would be around $120k/yr.
Here’s the question: I want to expand to 3 more locations over the next few years and will need financing to do this. Currently, the $60/yr the business generates is my income which I need to live. The problem is if I take this money out of the business to pay myself the business itself shows little to no ‘actual’ profit which is troublesome when going for a business loan. The great news is the business generates revenue and profits but how do I structure it to be able to get a loan to expand? The silver lining is once I expand to two locations I’ll be able to live off the profits of location number two or location number one.
It sounds like you’ve got the makings of a good business! Your assumption is correct in that any potential lenders are going to see that you have virtually no cash flow leftover after you pay yourself. What they care about is where the money is going to come from to pay them. That’s why they look at things like DTI and DSCR to determine whether you’ll be able to make payments to their expectations.
From the small amount of information you’ve provided, which is all I have to go on, I would say that it sounds like you have two options. Either you stop taking an absentee salary, which doesn’t sound like an doable option. The other option is to operate as a the general manager, if you’re convinced it won’t hurt the operations of the business, and use the extra $60K that you’re able to free up as cash flow for the business to make loan payments with.
Even at those revenue levels, you may not attract many traditional banks unless you’re able to qualify for an SBA loan. That’s where I would start my search for a loan aiming at expanding the business with the way you’re currently planning. I wish you luck and please let us know if you run into any other questions!