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SBA image on the mend?


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When Frank and Vicki Pridemore, owners of a Badcock Home Furnishing Center store in Douglas, Ga., bought a second location in Valdosta, the couple decided they needed a new building to convert the store to the concept’s new format, Badcock & more. So they contacted a U.S. Small Business Administration (SBA) lender and within a week the lender was in their store, explaining options and helping them decide how to proceed.

“If any little problem or question arose, someone listened patiently and answered our questions or solved the problem quickly,” Frank Pridemore says. “I can strongly recommend (the SBA) to other small-business owners who are trying to grow or improve their business.” They closed on a new building in December 2005.

But while the Pridemores seem content with the help they received from the SBA, other business owners argue the agency’s image could use a makeover. Mike Oberholtzer, finance coordinator for Horsham, Pa.-based Aamco Transmissions, says some franchisees cringe when he mentions the SBA.

Oberholtzer has dealt with the SBA for more than two years, and has seen the administration’s streamlined procedures and third-party franchise registry speed up the loan process and make it easier to use. Yet, even as the program has improved, he says, the organization still doesn’t have a great reputation.

Franchisees don’t like seeing variable rate loans at 11 percent (with the 7(a) program) when the prime lending rate is 8.25 percent, and even streamlined, the process can take longer than desired, he says. Oberholtzer tells franchisees, “You’re getting a loan that’s co-signed by the government. There’s going to be some red tape involved. That’s just the way it is.” He adds: “I think personally it’s still a strong program.”

Some criticisms leveled against the SBA are unwarranted, says Chris Hurn, CEO and president of Mercantile Commercial Capital. Most recently, he says the organization was wrongly criticized because disaster loans following Hurricane Katrina were processed too slowly. The problem was largely staffing-related, says Hurn, who believes an agency that is focused on disaster-related issues such as the Department of Homeland Security should have been in charge of administering the program. “I don’t think the SBA is an appropriate agency to do that,” Hurn says.

While he acknowledges the need for continued reform, Hurn calls on recently installed administrator Steven Preston to address what he perceives as the SBA’s largest problem—its image. Under the former administrator, Hector Barreto, there were rumblings that the Bush Administration was trying to squash the SBA program. An improved image could increase both demand for SBA loans and the availability of capital, which would benefit franchises and other small businesses. “The growth of franchising could benefit if the SBA worked on its image a little bit,” Hurn says.

Loan amounts increasing, applications decreasing

Under Barreto, the SBA streamlined its loan process, shortening the loan approval process in some cases to less than 24 hours. The organization also increased the number of companies on the franchise registry and allows small loans up to $25,000 to go unsecured.

Darrell Johnson, president and CEO of FRANdata, a research firm focused on franchising, says the franchise registry just exceeded 600 companies, up nearly 20 percent from 2005 when it was closer to 500. The company has also charted 500 new franchise concepts in the last year, up from 300 new concepts the year before.

“What I think we’re seeing is a continuation on the trend toward higher utilization of SBA lending for franchise financing needs,” he says. “The increase is driven primarily from franchise concepts that are in that two- to five-year window of franchising.”

For the main two loans in the SBA’s program, the 504 Certified Development Company loan and the 7(a) General Business Loan Guaranty, the system has improved dramatically, sources say. “Generally speaking the program is full-speed ahead,” says Tom Ethen, vice president with Stearns Bank in St. Cloud, Minn.

But that’s not to say there isn’t further tweaking to be done. There are rumblings of increasing the limit for 7(a) loans from $2 million to $3 million, which won’t help the concepts whose investment level is significantly lower than the $2 million range, says Bernie Siegel, president of Siegel Capital, a franchise loan brokerage company.

“However, when you look at the food-related concepts in particular, where they are not owning their real estate but doing a build-out, let’s say, you could spend $1 million on your first location.” If the project is big enough, he says, these franchisees are “stymied” by the end of two units. “Sometimes they can’t get the second, or certainly their third unit done.” Raising the cap for these concepts will be “extremely helpful,” he adds.

The agency might continue doing some procedural changes, such as increasing loan amount limits to account for inflation. But Ethen thinks those are minor adjustments. “The program itself isn’t changing as far as the types of programs they are offering,” he says. “Demand is strong and money is available. There hasn’t been a change this year. Rising interest rates haven’t curbed any of that.”

However, Steve Olverholser, CFO of the hair-care franchise Great Clips, says that at one time about 30 percent of their franchisees used SBA funding. Today, a handful will use it. “Capital has been plentiful elsewhere,” he says.

Little Rock, Ark.-based Franchise Finance saw loan applications decrease between 20 percent and 30 percent for January through June compared with the same period a year earlier. Defaults have increased as well, says Rick Anderson, general manager of Franchise Finance.

The trend has to do with the cyclical nature of franchising, says Anderson. “Business is down,” he says. “Franchisors don’t like to talk about it, but we can measure it because we mostly do first-time franchisees.”

The decrease doesn’t worry Anderson, however. In general, he thinks, it might be a good sign because franchising typically slows when the economy improves. “When everybody is working they’re really not thinking of buying a business,” Anderson says.

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