1. Funding Decision Summary
Primary Financing Vehicle
SBA 7(a) Small Loan has been selected as the primary financing vehicle for Luxa Salon Suites based on comprehensive analysis in Phase 8 (Financial Model) and Phase 12 (Funding Strategy Research).
| Decision | Value | Rationale |
|---|
| Loan Program | SBA 7(a) Small Loan | Most flexible, best rates, longest terms for build-out financing |
| Loan Amount | $228,000 | Mid-range from Phase 8 analysis; 1.54x DSCR at 85% occupancy |
| Equity Injection | $57,000 (20%) | Exceeds 10% SBA minimum; demonstrates owner commitment |
| Working Capital Reserve | $35,000 | Separate from loan; bridges 6-month occupancy ramp |
| Total Project Funding | $320,000 | Complete financing package for facility launch |
Why SBA 7(a)?
- Program Fit: SBA 7(a) is the correct program for leasehold improvements (unlike 504 which requires real estate ownership)
- Rate Advantage: Prime + 3% to Prime + 6% (currently 11.25%-12.75%) beats conventional rates
- Term Length: 10-year term provides manageable monthly payments
- Guarantee: 75% SBA guarantee (for loans >$150K) improves lender approval probability
- Flexibility: Covers construction, FF&E, and working capital in single loan
Alternatives Considered
| Option | Why Not Selected |
|---|
| SBA 504 | Requires real estate ownership; not applicable for leased space |
| Conventional Bank Loan | Higher rates, shorter terms, stricter collateral requirements |
| ROBS (401k Rollover) | Adds complexity, requires C-corp (double taxation risk) |
| SBA Express | 50% guarantee (vs. 75%) increases lender risk |
| Equipment Financing | Only covers equipment, not TI or working capital |
2. Use of Funds Breakdown
Detailed Allocation Table
| Category | Amount | % of Build-Out | Funding Source | Notes |
|---|
| Construction | $150,000 | 65.8% | SBA Loan | Per Phase 9 mid-estimate ($63/sf) |
| FF&E (Furniture, Fixtures, Equipment) | $35,000 | 15.4% | SBA Loan | US + China split sourcing (39% savings) |
| Permits & Fees | $5,000 | 2.2% | SBA Loan | TI permit, ZCU, salon permit |
| Professional Fees | $10,000 | 4.4% | SBA Loan | Architect, legal, customs broker |
| Contingency | $20,000 | 8.8% | SBA Loan | 10% buffer for change orders/delays |
| Security Deposits | $8,000 | 3.5% | Owner Equity | Lease deposit (1-2 months rent) |
| TOTAL BUILD-OUT | $228,000 | 100% | SBA Loan | Matches loan request |
Owner Investment Summary
| Category | Amount | Source | Timing |
|---|
| Equity Injection | $57,000 | Personal savings | At closing |
| Working Capital | $35,000 | Personal savings | At closing |
| Total Owner Investment | $92,000 | From $150K available | |
| Remaining Cushion | $58,000 | Reserved for contingency | Post-closing buffer |
Working Capital Allocation
The $35,000 working capital reserve (separate from loan) bridges the occupancy ramp period:
| Month | Expected Occupancy | Projected Deficit | Cumulative Draw |
|---|
| 1 | 35% | $7,500 | $7,500 |
| 2 | 42% | $6,200 | $13,700 |
| 3 | 49% | $4,800 | $18,500 |
| 4 | 56% | $3,500 | $22,000 |
| 5 | 63% | $2,100 | $24,100 |
| 6 | 70% | $500 | $24,600 |
| Buffer Remaining | | | $10,400 |
Based on Phase 8 Base Case scenario with 7%/month occupancy ramp
3. Loan Terms Summary
Expected SBA 7(a) Small Loan Terms
| Parameter | Value | Notes |
|---|
| Loan Type | SBA 7(a) Small Loan | Under $350K qualifies for streamlined processing |
| Amount | $228,000 | Mid-range per Phase 8 debt service analysis |
| SBA Guarantee | 75% | Standard for loans >$150K |
| Term | 10 years | Standard for non-real estate business loans |
| Rate Structure | Variable (Prime + spread) | Typical spread: 4.5% to 6.0% for this loan size |
| Rate Range | 11.25% - 12.75% | Based on current Prime 6.75% + SBA caps |
| Prepayment Penalty | None | SBA standard (only applies to terms 15+ years) |
Payment Scenarios
| Rate | Monthly P&I | Annual Debt Service | DSCR @ 85% Occupancy |
|---|
| 10.5% (Phase 8 model) | $3,064 | $36,768 | 1.54x |
| 11.25% (current low) | $3,151 | $37,812 | 1.50x |
| 12.00% (current mid) | $3,266 | $39,192 | 1.45x |
| 12.75% (current high) | $3,382 | $40,584 | 1.40x |
All rate scenarios exceed SBA minimum DSCR of 1.25x with margin.
10-Year Amortization Summary (at 10.5%)
| Year | Beginning Balance | Principal Paid | Interest Paid | Ending Balance |
|---|
| 1 | $228,000 | $12,512 | $24,472 | $215,488 |
| 2 | $215,488 | $13,896 | $23,088 | $201,592 |
| 3 | $201,592 | $15,434 | $21,550 | $186,158 |
| 5 | $171,328 | $17,036 | $19,748 | $154,292 |
| 10 | $0 | $29,248 | $7,536 | $0 |
| Total | | $228,000 | $140,816 | |
4. Financial Qualification Summary
SBA Readiness Assessment
| Requirement | Standard | Luxa Position | Status |
|---|
| DSCR | >= 1.25x | 1.54x at 85% occupancy | PASS (23% margin) |
| Equity Injection | >= 10% | 20% ($57K) | PASS (2x requirement) |
| Break-Even Occupancy | Reasonable | 62% (below 85% target) | PASS |
| Working Capital | Adequate reserves | $35K (6-month bridge) | PASS |
| Credit Score (SBSS) | >= 165 | TBD (owner to verify) | VERIFY |
| Collateral | Personal guarantee | Owner commits | STANDARD |
Key Financial Metrics
| Metric | Year 1 | Year 2 | Year 3 | Notes |
|---|
| Revenue (85% stabilized) | $185,871 | $250,054 | $257,556 | Per Phase 8 Base Case |
| Operating Expenses | $177,766 | $178,872 | $184,244 | Includes 3% escalation |
| Gross Profit | $8,105 | $56,812 | $58,476 | Before debt service |
| Debt Service | $36,984 | $36,984 | $36,984 | At 10.5% rate |
| Cash Flow After Debt | ($28,879) | $19,828 | $21,492 | Y1 requires WC bridge |
| DSCR | 0.22x | 1.54x | 1.58x | Y1 covered by reserves |
Risk Mitigants for Lender
- Conservative Occupancy Model: Break-even at 62% well below 85% target
- Market Validation: Competitor waitlists indicate unmet demand (Phase 1-2 research)
- Working Capital Bridge: $35K reserve covers Year 1 cash flow deficit
- Owner-Operated Model: No management payroll in Years 1-3 reduces fixed costs
- Remaining Cash Buffer: $58K available after equity + WC injection
- Equity Position: 20% injection exceeds 10% minimum, demonstrating commitment
5. Funding Timeline
Milestone-Based Funding Schedule
| Phase | Timing | Activities | Milestones |
|---|
| Pre-Application | Months -6 to -4 | Credit verification, document gathering, entity formation | Owner credit check, EIN obtained, initial lender contact |
| Application Prep | Months -4 to -3 | Complete business plan, assemble full documentation package | All documents ready, business plan complete |
| Application Submit | Month -3 | Submit to primary lender (M&T or TD Bank) | Application accepted, lender questions answered |
| Underwriting | Months -3 to -2 | Lender review, SBA approval process | Conditional approval received |
| Closing Prep | Month -2 to 0 | Site selection finalized, lease negotiation, insurance quotes | Lease signed or LOI executed |
| Closing & Funding | Month 0 | Loan closing, initial disbursement | Funds available |
| Build-Out | Months 1-4 | Construction per Phase 9 timeline | Staged disbursement per contractor milestones |
Detailed Pre-Application Timeline
| Week | Activity | Owner Action | Deliverable |
|---|
| 1-2 | Credit verification | Check personal + business credit scores | SBSS score 165+ confirmed |
| 2-4 | Document gathering | Collect tax returns, financial statements | 2-3 years returns assembled |
| 3-4 | Entity formation | Form LLC if not complete | Articles of Organization filed |
| 4-6 | Business plan draft | Review Phase 1-11 outputs | Draft business plan ready |
| 6-8 | Initial lender contact | Meet with M&T / TD Bank | Pre-qualification discussion |
| 8-12 | Complete package | Finalize all documentation | Application-ready package |
Disbursement Schedule (Build-Out Phase)
| Milestone | % of Loan | Amount | Trigger |
|---|
| Closing | 30% | $68,400 | Loan documents signed, lease executed |
| Rough-In Complete | 30% | $68,400 | Framing, MEP rough-in inspected |
| Substantial Completion | 30% | $68,400 | Certificate of occupancy pending |
| Final | 10% | $22,800 | CO issued, punch list complete |
| Total | 100% | $228,000 | |
Disbursement tied to contractor payment schedule (30/30/30/10) per Phase 9
6. Summary
Funding Package Overview
TOTAL PROJECT FUNDING: $320,000
SOURCES:
āāā SBA 7(a) Loan: $228,000 (71%)
ā āāā Construction: $150,000
ā āāā FF&E: $35,000
ā āāā Permits/Fees: $5,000
ā āāā Professional: $10,000
ā āāā Contingency: $20,000
ā āāā Security Deposits: $8,000
ā
āāā Owner Equity: $57,000 (18%)
ā āāā Down payment / deposits
ā
āāā Working Capital: $35,000 (11%)
āāā 6-month operating bridge
OWNER TOTAL INVESTMENT: $92,000
REMAINING CUSHION: $58,000
Next Steps
- Verify Credit: Owner must check SBSS score (target 165+) before proceeding
- Form Entity: Complete LLC formation and obtain EIN if not already done
- Begin Documentation: Start gathering personal tax returns and financial statements
- Schedule Lender Meetings: Contact M&T Bank and TD Bank for pre-qualification discussions
- Complete Phase 14: Business plan assembly (compiles all prior phase outputs)
Funding Structure Specification Complete
Phase 12: Funding Strategy - Plan 01 Task 1 Complete