“Through discussions with numerous banquet hall owners, we learned that most halls run at full capacity because they usually host multiple parties in a weekend night.”
Small Business Administration (SBA) is a government agency that provides guaranteed loans to support entrepreneurs and small businesses. The SBA partners with local banks which provide loans to businesses and then the SBA guarantees the payment if the borrower defaults on the loan. The SBA backing increases the likelihood of banks lending funds to small businesses.
Due to our experience running an African restaurant and catering parties, we observed the high demand for banquet halls to host wedding and birthday parties. Banquet halls are in so much demand that they determine the dates for most wedding parties. Through discussions with numerous banquet hall owners, we learned that most halls run at full capacity because they usually host multiple parties in a weekend night. We later determined that starting a banquet hall business under the same Simi’s brand will be a profitable venture because Africans throw a lot of parties and there wasn’t a banquet hall in Chicagoland that catered to the African demographic.
We made the commitment to get into the banquet hall business in early 2018. We decided to purchase a location as opposed to renting a property because we understood that we will need some investment to build out the place, as such, we did not want to invest in upgrading a property that we did not own. We looked to purchase a property that met the following criteria:
- Less than $500k
- Location that could host up to 250 people (4,000 sqft)
- Property within the Chicago city limits
- Abundance of parking spots
We signed up for Berkshire Hathaway’s Commercial MLS listing and received a daily list of available commercial real estate that met our criteria. We would review listings everyday, and 95% of the properties did not meet our needs; after sorting through a large number of properties, we finally settled on a former jewelry store located in the Belmont Central neighborhood of Chicago. This was not a perfect location because it was west of the city, where many Africans do not explore, in addition, there were only 15 – 20 parking spots available. However, there were positives about the location, it was relatively cheap, it was listed for $275k. The property was large at over 5,000 sqft and had a predominantly Latino population, which throw lots of parties, as such, we could include them in our target market.
We contacted PNC Bank to inquire about a commercial loan because we currently use PNC Bank to manage the restaurant’s merchant account. We were introduced to the bank’s SBA representative, who initially requested the following documents:
- Loan Application – Form provided by the bank requesting details such as loan amount and general borrower information
- Personal Financial Statement – Document requesting information such as personal assets and liabilities, salary information, checking/savings accounts, car payment, student loans, credit card etc
- Letter of intent – Signed note from the seller verifying that we are indeed planning to purchase the property
- Estimated build out costs – Spreadsheet detailing line by line cost of building out the banquet hall post close
- 3 years of personal tax returns
- 3 years of restaurant tax returns
The bank reviewed the documents and then asked that we provide a business plan for the banquet hall. We accessed Bplan.com, which houses sample business plans for many industries. We downloaded a sample business plan for event halls and then customized the plan to fit our needs. See Simi’s Banquets business plan for the plan we submitted to the bank. The bank liked the business plan, the only suggestion was for us to include more details on the financial projections. Specifically, the bank wanted the first year income statement by month and a three year financial projection. The bank gave us these 1 year and 3 year Excel templates to guide us.
In addition, the bank requested for the restaurant’s previous year’s income statement and balance sheet. After that information was provided, we received a loan approval from the bank. The duration from when we contacted the bank to when we received the approval was 3.5 weeks. Below were the terms of the loan:
- Loan amount: $280k
- Interest rate: 5.3% (fixed)
- Payback period: 20 years
- Down payment: 10% ($28k)
- No collateral
Once the approval was granted, we were referred to the SBA loan closing coordinator, who gave us a checklist of additional documents to submit, which included the following:
- Environmental questionnaire – One page document inquiring about our knowledge of hazardous materials or environmental issues at the property
- Environmental risk assessment – A third party report opining on the environmental and safety status of the building
- Inspection results – A third party report providing its opinion on the condition of the building
- Appraisal – An external party’s valuation of the property to determine the property’s market value
- Insurance – Evidence from an insurance company indicating that they will insure the property post close
- Personal account statements (previous two months)
We completed and provided the aforementioned documents. The environmental risk assessment and appraisal cost $350 each and the inspection cost $875. While we were working with the bank, we were negotiating the asking price with the real estate agent and was able to reduce the sale price from $275k to $232k. We were able to drive down the asking price because we had a bank approval at hand.
Property taxes on commercial properties are generally higher than residential properties, even though the price of the property was low at $232k, the taxes were relatively high at $17k a year, which meant $1,400 a month on taxes leading to a mortgage payment of over $3,200.
As we were moving towards closing the deal, the inspection results came back and noted that there was significant damage with the roof and will cost over $30k to fix the damage. We brought this to the attention of the seller, however they indicated that the most they could credit us was $5,000. After multiple discussions and back and forths with the seller, the seller decided to back out of the transaction and the deal fell through thereby voiding the bank loan.
Til today the bank SBA contact reaches out to us periodically asking if we have found a new location that we would like them to fund, we have since moved on as we have focused our efforts on other priorities. However the bank loan experience demonstrates that both the bank and the SBA are incentivized to give out these loans, so as entrepreneurs, if one is willing to go through the paper work, the funds are indeed available for us at a reasonable interest rate.
If you have any additional questions around the process or documents, feel free to send us an email at mydiasporachronicles@gmail.com.
