Funny Money

Persistence And Creativity To Get Funding

Persistence was the key to Teears' finally getting funding, but Recknagel used creativity to fund a group of Blimpie stores and grow quickly. The minimum start-up cost for Recknagel's five-store chain was half a million dollars, and he didn't have it.

Recknagel inquired about loans at two Michigan banks. "Both turned me down flat as soon as I said the word 'restaurant,' " he remembers. "Raising $500,000 for any venture is difficult at best; getting such a large loan to finance restaurants is next to impossible."

Recknagel, then managing partner of the mezzanine firm Liberty Bidco in Southfield, Michigan, abandoned his search for a loan. Instead, he devised a strategy to convince a bank to provide a $500,000 line of credit. Plan in hand, Recknagel approached four friends who'd invested in other companies; each had a net worth of more than $1 million. He asked them for written limited guarantees-two for $100,000, two for $200,000-in return for 32 percent of company stock, divided on a pro rata basis. Recknagel explains: "These guarantees allowed me to walk into a bank and say, 'We need $500,000 to do this. You'll be first secured on a quality franchise and a growing restaurant. Because we don't know what kind of debt service repayment we can provide or when we'll build the second restaurant, third, etc., we look to do it interest-only, drawing on a line of credit. And we'd like some flexibility in repaying the debt in order to accommodate seasonal cash flows.' "

In short, Recknagel arranged for financing that posed no risk to the bank and limited risk to the investors. In addition to the $600,000 backed by the four guarantors, he provided an unlimited guarantee as the main partner. He further rewarded the guarantors by paying them a 1 percent royalty, also pro rata.

The bank agreed to the arrangement, providing the funds at 0.5 percent over prime. Since that experience in 1994, Recknagel has opened eight Blimpie locations, repurchased the investors' 32 percent interest in the company and refinanced $750,000 in debts with a loan backed by the SBA at a fixed rate of 8.5 percent.

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This article was originally published in the January 2001 print edition of Entrepreneur with the headline: Funny Money.

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