As banks cut back their ending, small businesses are having more and more trouble staying alive. How that plays out locally depends on who you talk to. Andy Schwabe is filing for personal bankruptcy after losing more than $200,000 of borrowed money on a failed children’s gym called Romp n’ Roll.
Schwabe initialed borrowed $185,000 to build the day-care, and then borrowed another $44,000 for operating expenses from his bank (which was the same bank as the franchisor). He also took out several other loans through the SBA and another bank.
Schwabe wanted to opened his own Romp n’ Roll in Midlothian after seeing how popular it was in the West End. His daughter loved it. So did he and his wife. So he became a pioneering franchisee (the franchisor is also in Richmond). But Schwabe was unable to bring in enough kids to cover the loan, and rather than lend him more money to meet expenses, he ran out of money last month. The franchise went back to the franchisor, who is now running it.
Schwabe discussed the demise with BizSense. Below is an edited transcript.
Richmond BizSense: What’s the state of your business?
Andy Schwabe: This is one of the things I’m really upset about. In my franchise agreement, it said the franchisor can just slide right in and take over my business without paying anything. The bank had a lien on the gym and stereo and sold it to him for $15,000. So the Midlothian Romp n’ Roll is still open.
RBS: How did you know you were in trouble?
AS: At first I figured it was the first-year blues. But we got more and more into the hole. And the number of kids coming in stayed strangely the same. Monthly income also stayed strangely the same, around $13,000 to $15,000.
RBS: You had no trouble securing $150,000 for the build-out. So what went wrong when you needed more capital?
AS: We needed money to operate. So we wanted to refinance the loans, but nobody was talking to me. We went to BB&T, Village Bank, and all sorts of other banks. We couldn’t get anyone to talk to us. No one would budge. We tried to save the business but the banks wouldn’t give us time.
RBS: The banks are in the business of getting their money back. Maybe they didn’t want to flush good money after bad?
AS: Well, our other option was bankruptcy. And we had two new programs we wanted to try. You see, there was a flaw in the business plan. We were pioneering franchisees and the model didn’t work like it did in the West End. We talked to other franchisees in other markets and they said the same thing.
But we were running out of money big time. I went in to the banks and said here’s what I need. The guy almost wet his shorts. He was flabbergasted. They gave me $44,000 to pay my bills but no operating line of credit. I needed money to operate but I had no more collateral.
RBS: Did your interactions with your bank deteriorate? Was there yelling?
AS: There wasn’t any yelling. But I was late on 100% of my payments all the time. And I was borrowing from Peter to pay Paul. The banks didn’t like the late payments, so they put a lot of pressure on me, saying, “We don’t care what your situation is, we need our payments.”
RBS: Do you think you could save it with more money?
AS: In my gut, I’d say no. There is a flaw in the business model. And I didn’t have deep enough pockets to sustain myself.
RBS: How did this affect your personal life?
AS: I am the emotional part of the family, and I’m sad and angry. My wife is glad I’m out of it. It was putting a lot of pressure on my marriage and my kids. And it was putting a lot of stress at home. My wife loved that I would be in business for myself (formerly in marketing for CBS 6). But at the end my wife couldn’t wait for me to be out of it.
RBS: You seem to think the bank could have acted differently. What would have been better?
AS: If the bank had come to the table, and restructured the loans, and said, “let’s make this work.” Or brought in the franchisor. These economic times require different kinds of thinking.
Editor’s note: Next week we will be speaking with a local banker.