Financing 101 For New Entrepreneurs
Article written by Jerry Merola of Amusement Entertainment Management, LLC
When it comes to financing, planning is everything, particularly with a new entertainment project. Business ‘start-ups’ are typically the most difficult to finance, largely because lenders will have very little history or data by which to base a credit decision. In an effort to improve your odds, it’s important to provide a sound business case that effectively outlines the merits of the project.
The business case should be in the form of an independently-sourced Market Feasibility Study as well as an internally prepared business plan. An independent market feasibility study document allows the lender to rely upon the unbiased findings of the issuer, instead of the beliefs of the developer/borrower. Since 2008, Federal bank examiners require banks to provide the practical basis for granting a commercial loan within the loan file itself, and as such, an independent review can go a long way towards making a lender comfortable to proceed with the transaction.
Commercial loans for entertainment facilities are often structured over a ten-year amortization period when utilizing a leased commercial structure and twenty years when occupying a wholly-owned structure. These extended amortizations provide the new business with more manageable payments, and allows owners to stabilize cash flows more quickly.
Most loans within the entertainment sector benefit from the support of the Small Business Administration or U.S. Department of Agriculture, both of which offer government guarantee programs capable of providing the issuing bank with a repayment guarantee of up to 75% of the outstanding loan amount. Such a guarantee provides significant support for a new business loan application, and serves as a key inducement in the bank’s underwriting decision.
The development of a suitable collateral package as well as the availability of personal guarantees from the business’ principals are important consideration elements within a bank’s underwriting process. It’s not uncommon for a bank to assign a lien to all business assets being purchased for the new entertainment facility as well as the application of liens on real estate or other assets currently held by the borrower. As a new business owner, it’s important to understand that the Lender is seeking sufficient collateral to support the repayment of the loan in the event the business was to underperform and/or miss its minimum objectives.
The issuance of a personal guarantee goes one step farther, in that the Lender seeks assurance from the individual shareholders of the business that they will remain personally responsible for the commercial loan obligation. A personal guarantee is often requested by lenders to insure that the business’ principals remain active and committed to the business itself, instead of ‘handing back the keys’ when the going gets tough.
Structuring the financing for a new business takes time. When initially developing an entertainment business concept, it’s important to consider the methods by which the business will be financed. Developer equity is an key part of the process – new business owners should strive to contribute 25% of the total project’s costs in the form of equity. This provides a lender with a suitable cushion, knowing that the business owner’s initial investment is often strong enough to protect the business from an over-leverage condition.
It’s critical that the size, contents, and scope of the business concept be in sync with the business’ ability to service the intended debt load necessary to complete the project. “Right-sizing” an entertainment project is often the key to its success, as the marriage between the market opportunity, development cost, and financing structure must be absolute.
A bit of planning on the front end will often produce solid and sustainable results on the back end. As many operators of entertainment centers have learned, an effectively formatted financing model can make the difference between a business that rewards its owner and a business that simply pays its bills. By following a well-charted path, you’ll take the guesswork out of financing your next entertainment project.