Case Study: A Bicycle Shop Struggles to Get a Loan

THE CHALLENGE Obtaining a $1 million loan to refinance the mortgage on the bike store, pay down credit card debt and obtain working capital.

THE BACKGROUND Kopp’s Cycle operates out of a small storefront on a quiet side street in downtown Princeton. Behind the counter is a repair studio that is lined with old wooden bins and is just big enough for three mechanics. Mr. Kuhn still sits at the workbench he used when he was a child working for his father, though the shop has moved several times in the intervening years. In the summer, there is room for two or three mechanics on the porch out back.

Kopp’s moved to its current location in 1989, when Mr. Kuhn and his sister bought the business from their mother. (Mr. Kuhn bought out his sibling’s interest in 1999.) In 2004, he bought the building for $801,000 with an adjustable-rate loan for $775,000, guaranteed by the Small Business Administration. By 2007, though, the rate had risen about three percentage points, to 10.75 percent. Moreover, Mr. Kuhn had grown tired of the paperwork that dogs an S.B.A. borrower. “I just didn’t want to dedicate hours of time putting together annual statements for them,” he said.

So Mr. Kuhn refinanced with Washington Mutual (“I sent them a copy of our tax return, and that’s all they wanted,” he said), signing on to a seven-year loan for $825,000, with interest fixed at 6.18 percent.

The loan is amortized on a 25-year schedule, however, so when it comes due in fall 2014, Mr. Kuhn will have to make a balloon payment of $775,000. (Balloon payments, typically refinanced at term’s end, are common in commercial real estate loans.) At the time of the loan, the store and its lot, the loan’s collateral, were appraised at $1.3 million.

In the intervening years, Kopp’s business has been battered. The effects of the recession have been intensified by online competition. Mr. Kuhn started noticing customers coming in with products bought elsewhere that they had browsed in his store.

“People come in with their smartphone and scan a bar code on a product that I have in my showroom, and what comes up on the phone is the three closest places and their price and then also what it is on Amazon,” he said. Revenue fell from a high of $485,000 in 2008 to $393,000 the next year. Mr. Kuhn kept himself afloat by borrowing on his credit card, mostly for personal expenses but also to buy inventory.

To rebuild sales, Mr. Kuhn cut prices on accessories, which — typical for a bike store — have provided most of his profits, Mr. Kuhn said. This lifted revenue to $473,000 in 2010, but profits fell sharply — Mr. Kuhn said his margin was just 1 percent last year, compared with 10 or 15 percent in 2008.

This has not greatly concerned him, he said: “When I get the books done at the end of the year, if I break even — if I don’t show any loss, and I show a little profit — as long as my guys are getting paid, all my bills are getting paid, and I’m getting paid, then I’m O.K.”

Mr. Kuhn adjusts his salary as necessary to keep the profit small. Also, he and his wife personally own the building and rent it to the store at a rate that exceeds their mortgage payment.

But the 12 percent interest rate on $100,000 of credit card debt has grated on him, as did the prospect of the balloon payment now three and a half years away. The solution, as he saw it, was a new 25-year loan that would consolidate the credit card debt with the $800,000 outstanding on the property and add $100,000 for working capital. He anticipated that the property’s value had risen to $1.5 million, enough to support a $1 million loan.

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