The Budget Gap
Where the Budget Breaks |
Lenders approve loan amounts. They do not build budgets. The approval reflects what the numbers support, not what the borrower actually needs to get to stabilization. That gap is the borrower's problem.
The Usual Budget Misses |
Underestimating construction, build-out, or soft costs
Underestimating time to grand opening
Not accounting for enough working capital
Assuming the business stabilizes faster than it does
None of these are surprises. They are predictable. They show up in deal after deal. The difference is whether the borrower planned for them or not.
The One Buffer Built Into the Loan
The SBA 7(a) startup loan structure includes a 3-month interest-only period for a reason. It provides time for the business to open, generate revenue, and move toward stabilization prior to full principal and interest payments. It is the only financial runway the loan provides. When it runs out, the payment steps up and the business needs to be ready.
My View From the Deal Desk |
Franchisor Budgets Get It Wrong
Franchisors provide startup cost estimates and stabilization timelines. They are almost always wrong. Construction runs longer than projected. Revenue ramps more slowly than modeled. The budget a franchisor hands you is built on historical averages nationwide. Budgets need to reflect the current economic environment and the realities of the local market.
The Lender's Job Ends at Funding
The lender funds the deal. Building the budget was never part of it. They are not building a cash flow projection for the borrower, stress testing what happens if construction runs over, or asking whether the borrower has enough in reserve to cover initial payroll. That is the borrower's responsibility.
Going Back for More Money
When borrowers run short after closing, the instinct is to go back to the lender. What most don't realize is that getting a second loan means starting the process over. New application, new underwrite, new approval. And this time, the lender is looking at a business already carrying debt service on the first loan. The cash flow that qualified them the first time now has to support 2 loans. Also, the lender has a portfolio to manage; they will work through the process on their timeline, not yours.
Final Thoughts |
The lender only funds the deal; the budget is the borrower's responsibility.
Construction timelines more often than not run over. Plan for it.
Going back for more money is not a backup plan. It is a whole new process.
Many businesses that struggle after closing were underfunded before opening.
P.S. If you know a business owner, CPA, banker, broker, or attorney who might find this useful, feel free to pass it along. They can subscribe here.
