Sources of Finance for a Franchise (featuring Steve Stovall of BeneTrends)
Amanda: Let’s talk a little bit about kind of the different options, and I know you had mentioned that an ideal approach is to have a little bit from all the different options, rather than all from one and kind of putting all your eggs in one basket. But the first one that you mentioned here in the beginning was just good old-fashioned cash, right. If you got more money than you know what to do with and you think business ownership is the right place to put that money, what are some of the benefits of just using cash? Obviously, there’s the obvious ones, but let’s talk a little bit about that.
Steve: Sure. You know, like I said earlier, it’s one that everybody’s most familiar with. If you have $10 in your pocket, and you’re going to buy an $8 item, then you’ll probably use your $10. But does it make more sense to use that $10, or is your credit card or debit card a better resource to use? And I take that kind of reasoning into a financing conversation. If someone has $300,000 in cash, and they’re looking to buy a $300,000 item, cash is probably not the best option.
A better option might be coupling some cash with some 401(k), some cash with some SBA and some 401(k) because, whereas you take $300,000 in cash, if we’re getting a small business loan, you put about 20% down. That’s going to be 60% for a $300,000 item. Perhaps you take $60,000 out of the cash, or perhaps you take $60,000 out of your 401(k), and then you move forward. And different people are going to have different points of view.
The person managing someone’s portfolio might say I’ll take that money out of cash. The person that’s watching an individual’s cash position might say take that out of the 401(k). So it really becomes a task of not only gaining the individual’s trust but speaking with their advisors as quickly as possible as well so that you can establish a little bit of continuity and establish yourself as an expert even to the experts. So if I say let’s not take $300,000 in cash, let’s leave the cash alone because the person might not be working and cash would be their best resource to hang onto, let’s take the $60,000 out of the 401(k) and let’s get a $240,000 loan, couple of things happened there.
You’re not using any cash. You’re using an asset, the 401(k), that has never been taxed. So it’s about the least expensive money that a person can use, and when you get a small business loan, you’re able to pay that loan off with typically a 10-year term, but you’re able to pay that loan off any time without any kind of penalty. So if the business is going gangbusters, let’s say, after a year, I’ll tell you what, let’s take some cash and let’s pay that loan off. And then just start enjoying the profit that you’re making, or let’s establish a premise where you’re more able to make profit now because you have no debt.
Or I might say let’s look at the portfolio that they might have, or something, and that might have $300,000, and that portfolio investment might not be performing very well. A margin loan, where you’re able to take a loan against the cash value of your stocks or bonds that are not in retirement accounts, and we might be able to create the $300,000 out of that portfolio loan. The interest rate for a small business loans is about 8.25%. The interest rate for an SBS loan is about 8.25%. For a portfolio loan, it’s about 5.5%. Home equity might be about 4.5%.
So if a person is employed and has home equity, that might be an option. Or, again, bundling these resources together might be the best option, but I give my client, as soon as I get the financial assessment [inaudible 00:05:36] options with what I think is most likely to happen if we were to employ a strategy versus another. And, again, it’s about knowing your audience a little bit and making conversations that are going to excite the client to become more engaged. And, like I said, if I find out that the client is very debt-averse, I certainly won’t talk to them in a lot of detail about creating a loan for themselves. I’ll talk about more debtless intensive ways of getting themselves into business versus someone that doesn’t mind acquiring some debt in order to do what they want to do. So it’s almost like a dance with someone. You have to take what they [inaudible 00:06:52] and present it back to them in such a way that it becomes engaging and they feel like I’ve got their best interest at heart, which I do, but that I’m listening to them and I can make this work.
Amanda: Let’s dive into…So we talked about cash. You had mentioned the 401(k), the IRA. I think you called it the Rainmaker program. Explain a little bit about what that is for our listeners, and then let’s get into the pros and cons of that. Again, maybe as a whole option or part of kind of that financing profile for your business. So start off with what is the Rainmaker or the ROBS program.
Steve: So this goes back a lot of years with IRS Code 4975, and the ERISA Act, and all kinds of federal things. But, in simple language, in a situation where you have an IRA and/or a 401(k) from a company where you’re no longer employed, you’re able to pull that money out of your stock market, or whatever investments you have, liquidate that into cash, and then take that cash and roll that money over into a C corporation and use that money as operating capital.
So, first, we create the C corp. Then, we create a new retirement plan for the C corp. The money from your investment retirement account will roll over from wherever it is into the new 401(k) or a profit-sharing plan and the new profit-sharing plan or 401(k), but then invest in the corporation. And up to 100% of those dollars can go into the corporation. Once the money lands in the corporation, it’s capital for business use, and we haven’t created any tax or any penalty for this person that is doing this.
Now, the beautiful thing is that we’ve used money that’s never been taxed, so it’s about least expensive money that you can use. You are creating a new 401(k) or a profit-sharing plan for yourself. You’re a new employee of your company, so not only can you take a salary as a new employee, but you can start making contributions into this new company that you created, and you can direct those investments back into the stock market. So you’ve made a big circle there, and the company that you [inaudible 00:09:59] invest in the market.
You’re able to offer 401(k) benefits to your employees. I can’t think of a better way to anchor an employee than by offering them benefits that will assist them as they’re working now and as they get older. The money from the 401(k) can be used as an equity injection for the SBA loan, and there are…I could go on and on about it, but those are really some important options.
And the one downside, and there is really just one, is that if the business fails, then you’d lose whatever 401(k) money you invested in your business. However, if your business fails, whether you use cash, or 401(k) money, or SBA money, or portfolio money, it’s gone. So if you look at this way, if you’re starting a business and that business has to fail, what’s the least expensive way for you to fail? The 401(k). So if the expense works both ways, it’s cheap to start, but it’s also inexpensive to fail. And that is probably the least impactful way for someone to think about financing a business.
Amanda: Great answer. Sounds like that’s a really good way to go either entirely or as part of kind of a bigger picture, but the tax-free, all the benefits, definitely sounds like it outweighs some of the more negative options. So thanks for sharing that information.
Amanda: Let’s talk a little bit about non-retirement funds and borrowing those. So what are some options as far as non-retirement funds go?
Steve: So if you have a regular portfolio, if you walk down to the Philadelphia Stock Exchange and you get $100,000 in stocks or a stock, you have that piece of paper that says you have so many shares of stock, but that paper has cash value. And your broker is able to help you borrow against your portfolio, so if you have $1,000,000, you could probably borrow up to about $800,000 to $900,000 against that portfolio. It’s a little bit tricky because, as I said, if the stock market goes down significantly, then your broker could call the loan.
So when you roll money over, you’ve taken it out of the stock market, you’ve invested it in your business. When you take a margin loan, if the stock market crashes, then you have to replace that money. So the positive is…are you able to borrow a lot of that money at a low interest rate. The negative is, if the market goes down significantly, you could have to pay a lot or all of that money back unexpectedly, and that could be a problem, especially if you’ve invested it in your business.
Amanda: So it sounds like the pros and cons kind of balance each other out with that one. You know, it’s a lower interest, but there is kind of that unexpected potential there at the end.
Steve: Exactly. And with the market, it’s been strong for a long time, but Murphy’s Law says what can go wrong will go wrong. And you never know when the stock market is going to pull a Murphy on you.
Amanda: That’s, again, great advice, right. Murphy’s Law, especially when it comes to money and to finances that are potentially tied up in a business is definitely something that you want to consider. Let’s talk a little bit about the unsecured lines of credit. I know it’s not something you would recommend, but what is a time that somebody might want to consider that, or what are some of the benefits, if there are any, to something like that?
Steve: I consider this my financing of last resort, but if an individual has excellent credit, anymore from, let’s say, 750 to 850, something like that, then there are companies out there that will help you get unsecured loans to credit. Basically, they help you get a bunch of credit cards, take cash advances against those credit cards, and then pay them back.
If someone doesn’t have the roll over or the portfolio, if someone doesn’t qualify for a loan because they don’t have an equity injection or because they don’t have collateral for the loan, then this might be something they could explore. The lines of credit are typically maxing out at about $150,000 or $200,000. This could be a great operating capital fund for someone, and a lot of times you have up to two years of zero interest.
So if you are able to get the line and then get the line paid down before the interest kicks in, then you have a great chance of making it out without getting scathed. I’ve never seen anyone turn their business around or get their business ramped up that quickly, so, again, I tend to stay away unless it’s just a bad situation and someone is literally in dire straits. But it’s not something that I would recommend because, literally, getting 10 credit cards at one time, taking cash advances against all 10 of them, and then trying to stay ahead of payments and mind your business and keep your life going the way that you like, that’s a lot of pressure to put on anybody.
Amanda: Yeah, it sounds like you got a lot of plates spinning, especially adding it to an already full plate, no pun intended, of all the different things that it takes to get a business up and running, and then to add that into the equation just sounds like a whole lot of room for potential error. And it also sounds like pretty expensive money if you don’t get out before that interest starts to hit.
Steve: Exactly. Again, I’ve done it a couple of times in my career, but I try to stay away from that unless I’m just forced up against the wall. I would almost rather encourage someone to wait for…save money, or take some more time to think about this, or get some money from a family member, or something like that, rather than to do this one thing. But, in its defense, because the only pro is that you’re getting money. There are a lot of cons, but if you need the money and you really have no choice, then it is what it is.
Amanda: I knew there had to be at least one silver lining in that. But you’re right. I mean, sometimes, if your back is up against a wall, you’ve got to explore all the options, and it sounds like we’ve talked about a lot of different things, right, from cash, to retirement money, to non-retirement funds, and unsecured lines of credit. And all of them have different pros and cons associated with them. Some, if you’re more of a risk taker, might be a better fit for you versus somebody who’s more risk averse and is wanting something that’s a little bit more steady and secure.
So, Steve, we talked about SBA loans, good old-fashioned Small Business Administration and things like that. So anything you want to add or just inform our listeners about? Just the SBA loans and things to…you know, if that’s a great idea or things to be aware of, potential pitfalls with something? I know it’s probably the most common or one of the most common, and you can probably speak to that more than I can, obviously. But let’s talk a little bit about them.
Steve: Well, and I think when people hear SBA loans, they get a little bit of fear because there’s always a lot of bad things that are being bandied around, you know, they take a long time, the interest rate’s outrageous, and all of these things. The fact of the matter is that the Small Business Administration is primarily for new business owners, and the SBA offers a few loans that are very practical. And if you work with a company like BeneTrends, the benefit of a BeneTrends is we work with a couple hundred lenders.
We have lenders who are traditional SBA lenders where you put 20% down, your interest rate is going to be prime plus 2.75%. The loan’s 10 years. You have collateral. You have the injection, like I said. You demonstrate that you can repay the loan. You have some sort of related business experience. You have excellent credit score. But we work with so many lenders that we’re able to get, a lot of times, lower than regular interest rates. We have banks that are looking at categories of franchise business. We have banks that are looking at specific industries. We have banks that are offering fixed rate SBA. We have banks that are offering escalating SBA interest rates. They’ll start low and level off at a higher rate.
We have lenders that are lending for blocks of business unit…If someone buys three ice cream parlors or something like that, we have lenders that like that ice cream parlor concept so much that they’re wrapping enough money to build out three in a loan program, and they will distribute the money one ice cream shop at a time. So there are actually a lot of nuances to the SBA loan, the 7a, which I call it the bandage for the franchise world. It literally goes from $50,000 to $5,000,000.
There’s the 504 loan, which is specifically for real estate, but if you’re getting a business that has real estate, the 504 loan could be for you. We also have the express loan, which is under $150,000. There’s another loan that goes up to $350,000. So we have an assortment of loans under the banner of SBA, but one loan might be better for you. And if you’re talking to someone that is an expert with SBA, like a BeneTrends is, we have people that can help you get your loan packaged and into a person’s hands, the lenders hands, and have it turned around so that you go from applicant, to getting a proposal from a lender, to selecting the lender that you want to work with, to getting a loan commitment from a lender in about 40 business days or less.
Amanda: Wow, that’s a lot quicker than I thought it would be.
Steve: Exactly. And, again, we are here to try and dispel the myth of the monstrous SBA process. We have a bunch of people on our SBA team. They’re all extremely proficient and professional, and I think that if someone is looking for an SBA loan, they might say, “Well, you know, why wouldn’t I just go to my local bank?” And the easy answer is your local bank may have never funded what you’re looking at.
When you pitch your deal to the bank, they might say, “Oh, my gosh. That is the greatest thing I’ve ever heard,” and it goes from underwriting, to funding, and all of a sudden you find out that, “Yeah, we’re not very pleased with the performance of that concept,” or, “We don’t like it,” or, “Someone had an argument with their significant other last night and came in in a bad mood today, and they just don’t want to think of anything new.” There’s so many things that are out of the borrower’s control that, as silly as that sounds, who knows?
But, again, this is the purpose for working with a professional company that works with more than one bank. We always have a bank that is interested in a new concept, that is interested in a new spin, that is doing a new business. As a matter of fact, we have a 98% success rate for the loans that we try to place. And if we can’t get you a loan approval, then we’ll refund your money.
Amanda: Good to know. Steve, you are an absolute wealth of information on all things financing small businesses and new businesses. I’ve got lots of great takeaways from our time here together today, and probably the biggest one is working with a company and with people that you trust, right, because this is new for a lot of people, especially buying a business or getting funding for a business. It’s not something that most people do every day, so finding somebody that is going to take you through the process in a way that, you know, has your best interest at heart, right, not that everybody is trying to make a quick buck, but they’re really considering all the different components, you know, what the industry is, what the particular franchise model is, how that’s going to impact your income, and all the things that go into that.
Also, I could never ever share too much the importance of being organized and being prepared for that situation, having a backup plan, especially when it comes to making that transition from a career your whole life to business ownership and working for yourself, the importance of staying organized and being prepared with a backup plan. Can’t stress enough on that. But I’m going to leave our parting remarks today to you. Is there anything, any advice that you would give our listeners that are exploring this or looking at different options? Anything that we didn’t get to talk about today that you want to just share more on?
Steve: Well, you know, again, I truly appreciate the opportunity to have this forum, and hopefully I will be able to come back and talk a little bit more about the finance role, the role that financing plays, in buying a business or a franchise. But just make sure that the franchise is the right one for you. You cannot ask enough questions when you go and visit the franchise. A franchisee, a client, should remember that they are interviewing the franchise just as much as the franchise is interviewing them.
Steve: So they shouldn’t go in like they’re meeting their date’s father for the first time. Literally, it’s going in like equals. This is going to be a partnership. This is a marriage for at least 10 years, so you have to like the franchise, and the franchise has to like you, and please keep that in mind. And I will say my last bit of information is that we have 11 of 12 people on our consulting staff. So maybe somebody called them and they talked to me, and they don’t really like my personality. That’s okay. We have 10 or 11 other people for you to talk to. So we understand that one size does not fit all, and we want to make ourselves open and available and attractive to very person that is out there. So if anyone is looking for business advice or franchise finance, please, give BeneTrends a call.
Amanda: Absolutely, Steve. And what number can they reach you at? If our listeners do have more questions or want to chat more about some of the details, how can they get a hold of you?
Steve: Amanda, I am glad you asked. My cell number is 267-273-4319. And because I live in California and I know that a lot of people are not in California, my day starts pretty early. I start at 5 a.m. Pacific, and I’m available until 6 p.m. Pacific. So that gives them a wide options in order to get in touch with me, or they can email me at firstname.lastname@example.org. Or if they want to call on the weekends, I am generally taking calls on the weekend from 6 a.m Pacific till 12 p.m. Pacific. So I really try to make myself as available as possible.
Amanda: Great. Well, Steve, thanks for being here. I’m getting the nod here. I would love to have you on again. There’s so much information here. Looking forward to it. Well, we were going to try and keep them later in the afternoon for filming, but since you’re up so early out there on the West Coast, maybe we’ll schedule some morning time out in sunny California. Or you know what? Better yet, I think Charles and I are just going to have to come out there and film live in your offices. I’m getting two thumbs up here from our producer. So maybe we’ll make that happen but, either way, we’ll definitely love to have you back. And thank you so much for your time and for all the wonderful information that we’ve gotten. I’ve learned a lot. I can’t speak for anybody else, but looking forward and, Steve, thanks again or being here, and enjoy the rest of your day.
Steve: Again, thank you for the great forum. I really appreciate your time, and I love what your efforts have brought. Thank you very much. I look forward to the next time, and have a great day yourself.
Amanda: You too. Thanks. Bye.