Finance Tips from Experts on Navigating the New Lending Environment
Lending has become “functionally dysfunctional,” Ronald Feldman, CEO of Siegel Financial Group, told a standing-room-only audience at the Financial Summit of the International Franchise Association convention in San Antonio last month.
Until sometime early in 2008, the secondary market for business loans was booming and the supply of money was greater than the demand for capital. Then the equation switched and now, said FRANdata CEO Darrell Johnson during a session called “How to Talk to Lenders in 2010,” “financing is harder to find than franchisees.” National lenders, who understood franchising, are overburdened by mortgage and commercial real estate debt and have left the lending marketplace. Many regional lenders also took on too much mortgage debt and are gone as well. The only lenders left are the nation’s 8,000 community banks, and getting a loan from them is difficult because:
• They don’t understand franchising.
• Unlike national lenders that sold off loans to secondary markets, community banks finance loans themselves, keeping them in their portfolios for seven to 10 years.
• They average only three SBA-guaranteed loans a year; many make none.
• They are risk-adverse and “looking for a reason to say no,” said Bob Rodi, president of the Mt. Pleasant Capital Corporation.
Before we share tips from IFA speakers on how to overcome that mindset, here’s more bad news:
• All banks prefer large loans to small ones. If someone needs to borrow $100,000 or less, they shouldn’t be getting into a franchise, said one speaker.
• Many banks will not loan money for restaurants, no matter how sound the concept or the borrower.
• Franchisees from California, Nevada, Michigan, Florida and Arizona will have an even tougher time than those from less recession-impacted states.
“Bankers are not mean and nasty,” said Johnson, “but if they are going to carry a loan on their books for eight years or more, they want to be sure the franchise system will be around long enough for the loan to be paid back. Performance matters.” To qualify for a loan, a franchisee must:
• Have a credit score of 700 or better. No bankruptcies; no high levels of credit card debt. If you are upside-down on your home, no bank will give you a loan.
• Be able to make a 30-percent to 50-percent down payment from non-borrowed funds.
• Have a working spouse whose income covers your living expenses or have at least three to six months of living expenses in the bank.
• Be joining a system in which the average franchisee earns enough to cover your living expenses. “If an applicant needs $150,000 a year and the Item 19 shows an average income of $100,000, he will be turned down,” Feldman said.
• Have enough tangible net worth to cover working capital needs of your franchise for a year. This means cash, stocks, bonds, cash value of your life insurance, your 401k or the real equity in your home (the lender will do an appraisal).
• Have a resume consistent with your tax returns and credit reports.
• Provide a detailed business plan. If you need help, contact a Small Business Development Center. Find them at www.sba.gov.