Non-Traditional Lenders: A New Tradition of Success
by Penn Ritter, Executive Vice President of Business Lenders
In Hamlet, William Shakespeare wrote, "Neither a borrower nor a lender
be." That's sound enough advice, I suppose; but the Bard never would
have given such advice to prospective franchisees. The truth is
franchisees almost always need to be borrowers; and they very often face
the challenge of finding a willing lender-one who offers flexible
underwriting criteria and manageable repayment terms.
Banks often seem unsure of whether they really want to loan to
franchisees or other small-business prospects. They often seem more
intent on conforming to the bank's rigid underwriting rules than
nurturing the entrepreneurial spirit. In contrast, when it comes to
lending through the U.S. Small Business Administration (SBA) the
question is not 'to be or not to be.' Rather, the SBA non-bank lender
is more likely to ask, "How much do you need?" and "When do you want to
close?"
Need A Loan? You're Not Alone.
According to recent SBA statistics, there are more than 4,027 franchises
doing business in the United States. Between 1996 and 1997 -- within
just one year -- the number of loans made to franchises in the United
States increased 107 percent! By the year 2000, 50 percent of all
retail sales in the United States will come from franchise businesses.
Who's financing this rising tide? SBA non-bank lenders.
No Checks, Plenty of Balance
Unlike banks, most non-bank lenders concentrate solely on your loan.
SBA non-bank lenders don't demand you use all their services in order to
obtain a loan. SBA non-bank lenders don't 'cross-sell' because
cross-selling makes people cross. Where you deposit your day's receipts
or invest your company's retirement or hold your checking account should
be up to you. You shouldn't be held hostage in order to qualify for a
loan. The old adage that banks lend you money when you don't need it,
and offer restrictive underwriting criteria when you do, may be a bit
harsh. But SBA non-bank lenders are much more likely to look harder and
deeper because all they do is make loans. They're more likely to be
interested in the individual borrower and the franchise, taking into
account professional goals and character, training and hiring practices,
positive trends in recent credit history, and the current and future
health of the franchisor.
In addition, many banks can't use local capital to finance out-of-state
businesses. Since the SBA is national, its ability to lend isn't
restricted geographically. So, your SBA non-bank lender can provide you
with the loan you need, when you need it and where you need it.
Most importantly, SBA non-bank lenders often specialize in loans to
start-ups in local and under-served communities-constituencies from
which banks are often likely to shy away. SBA welcomes these
constituencies, as well as other entrepreneurial borrowers. It's a
major reason the SBA exists. Rather than risks, non-bank, SBA lenders
often view loans to franchisees as opportunities.
Flexible Goals, No Penalty Kicks
To coincide with the varying goals of prospective franchisees and the
purposes for which they need to borrow, SBA non-bank lenders offer loans
of varying amounts and terms. Most will lend up to $1,000,000, with
typical terms being 10 years for working capital (funding for the
purchase of a first franchise, a second or third franchise, or the
expansion of an existing one); 15 years or useful life for equipment; 25
years for real estate; or a blended rate combining all three for
multi-purpose loans and more flexible repayment terms. A blended rate
for working capital, equipment and real estate is a beautiful loan for
most borrowers.
Best of all, long-term SBA loans can offer low monthly payments, so
borrowers won't fear being strapped. Plus, with no prepayment penalties
for early pay-off, borrowers can remit more than the amount of their
monthly payment, paying off the loan a bit or a chunk at a time.
Borrowers then can watch their businesses grow and their balance sheets
tilt in their favor.
Inspiring the confidence of prospective franchisees in their financing
terms is critically important. Franchisees don't want to be afraid of
debt-and needn't be. Long-term growth often depends on initial debt.
Almost every business has to borrow to grow. The key is this: the
borrower shouldn't be preoccupied with the uncertainty of debt. Rather,
the borrower should be able to feel confident about managing that debt
profitably. This is yet another way in which SBA non-bank lenders
demonstrate their franchise-friendly value -- helping you arrive at the
right amount of debt for you.
Knowledge Is Power
Non-bank, SBA lenders who specialize in franchise lending are uniquely
positioned to offer advice on two fronts: First, because they know the
market, they are able to advise prospective franchisees on the balance
sheet strength of particular franchisors, helping the prospect with
considerations such as stability of the industry and reliability of the
franchisor. Second, SBA non-bank lenders who specialize in franchise
lending are able to guide each loan carefully. Borrow too little, and
you may not ensure enough reserves to keep the business afloat through
the start-up period. Borrow too much, and you won't sleep at night.
In other words, SBA non-bank lenders can help you determine the amount
you need to spur growth-without tying up your cash-flow. As non-bank,
SBA lenders, we're as concerned about our borrowers on Day 90 as we are
on Day One. We want our borrowers to be able to eat, and we want them
to eat well.
Penn Ritter is a founder and executive vice president of Business
Lenders (an SBA "preferred lender"), chair of the SBA's Connecticut
Advisory Council, and a member of the Government Affairs Committee of
the Greater Hartford Chamber of Commerce. Business Lenders provides
SBA-funded financing through its National Franchise Program. Penn can
be reached at 1-860- 244-9202 or 1-800-646-7689.
