SBA backing put expansion on menu.

Milwaukee's century-old Brady Street shopping district has gentrified the past 15 years into a trendy mix of restaurants, coffee shops, bars, boutiques and hip second-hand stores.

Brady Street would seem an unlikely place for a walk-in hamburger and frozen treats shop, but Mike and Kim Schmidt decided otherwise. In 2000, they opened Bella's Fat Cat to almost instant success as a cool place--and the only place--to get a burger and a milk shake in a city neighborhood.

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Since then, the Schmidts have repeated the business model in two other Milwaukee neighborhoods full of hipsters and college students. Bella's also has a growing following among families with young children.

The Schmidts, Milwaukee natives who met in high school, attribute their success in selecting sites to their "feel for Milwaukee." As city dwellers themselves, they decided Brady Street would support their concept, and their gut feeling has proven accurate.

"It was more of what we wanted," Mike said of the site-selection process. "You had to take the expressway to get a burger."

In seeking financing, the Schmidts were helped by Mike's business track record. Mike, 38, had started three bars, and sold his share due to philosophical differences with his partner, he said. His first job was at a frozen custard stand. Kim, 36, had worked as a waitress since her teens, and the two wanted to go into business together.

For startup capital, the Schmidts had some cash from Mike exiting the bar business and a small family investment, but needed a loan.

As a restaurant and essentially a startup, Bella's fell into a higher-risk category that made it a candidate for a Small Business Administration-backed loan, said Carol Mick, vice president of SBA lending for Stearns Bank in St. Cloud, Minn.

Stearns provided SBA 7(a) loans for the Brady Street location and Bella's second site in the Bay View neighborhood. The first loan in 2000 was for $75,000 and covered equipping and remodeling leased space on Brady Street. The second loan in 2004 was for $285,000 and paid for buying, remodeling and equipping an old pharmacy building.

Bella's has paid off its first loan; the second loan has a 15-year term.

The SBA's 7(a) loan is its most popular financing program. Lenders like Stearns Bank that participate in the program share the risk with the SBA for a maximum loan of $2 million with a term of as long as 25 years. Proceeds can be used for a variety of purposes, including buying land and equipment.

Mick says Bella's was a good candidate for the 7(a) because it allows a down payment of 20 percent compared with 30 to 40 percent for a conventional loan. Also, borrowers don't need as much collateral.

SBA loans also allow longer terms, which means the business doesn't have to refinance after three years.

Eric Ness, Wisconsin SBA director, said restaurants represented the third-highest category of business receiving SBA-backed loans in Wisconsin in 2007. The main reason is the advantage of the longer terms, which allows lower monthly payments and improves cash flow for the small business.

Mick said one thing the Schmidts do well as small-business owners is rim their business hands-on.

"You have to be there and make sure employees do what you want them to do," Mick said.

In 2005, the Schmidts opened a third location, this one near the University of Wisconsin-Milwaukee, where they bought and remodeled a former doughnut shop. For the $225,000 project, they tapped SBA-backed 7(a) financing again, this time through Park Bank in Milwaukee.

Many companies receive multiple loans until reaching the $2 million limit, Ness said.

The result of the remodeling is a throwback to a 1950s drive-in with some seating and no drive-through. The interior is heavy on the chrome with murals and art featuring a blue-colored cat that is fat. The mascot and restaurant name is based on the Schmidt's late--and fat--pet cat Bella.

Bella's does some advertising but has relied mainly on word-of-mouth and curious passers-by to attract business.

One challenge for Bella's is seasonality, as Milwaukeeans consume more frozen custard during warmer months. Although the Schmidts reduce employment from 75 to 45 during the cold-weather months, Bella's has encountered cash-flow crunches.

For advice, Mike turns John Broderson, who owns Popeyes Famous Fried Chicken franchises in Milwaukee and elsewhere in the Great Lakes states and is a Bella's fan. Mike also talks regularly with Mike Idol, who owns some trendy restaurants in the same eastside neighborhoods as two of the Bella's locations.

Thus far, Bella's has stayed current on its loan payments. Revenue, which was up about 5 percent in 2007, will reach about $2 million this year, Mike Schmidt said.

While the Brady Street location was Bella's first, the Schmidts closed it April 1. Mike Schmidt said the location's limitations, including lack of parking, led him to sublease it to another burger joint. He's keeping the custard-making equipment for a future location.

"We've just outgrown that location," he said.

He's also looking to transition his role from running restaurants to running a company and is seeking an investor for further expansion. The Schmidts have rejected offers to sell and don't want to franchise.

"We might as well grow, because we can't work any more than we're doing," Kim said.

MIKE SCHMIDT'S BIGGEST CHALLENGE?

"The rising cost of goods sold, mostly related to high fuel and energy costs."

ADVICE FOR A STARTUP?

"Be prepared for hard work and a lot of hours dedicated to the business. To have as detailed a business plan as possible before starting. Don't be afraid to seek others' advice."

Bellas's Fat Cat Ltd. * 2737 S. Kinnickinnic Ave., Milwaukee, Wis. 53207 * (414) 747-9746 www.bellascustard.com * Founded 2000 * 7 full-time employees * 2007 revenue: Nearing $2 million