Most small business owners are likely to be severely impacted by recent commercial lender changes. In almost all cases, the business lending changes are permanent and cannot be avoided if a commercial borrower wants to continue their present banking relationship. One noteworthy exception is illustrated by a few new and more flexible commercial lending sources.One of the biggest commercial lending changes involves new guidelines for working capital financing. Most banks appear to be quietly eliminating business lines of credit or severely reducing the amount they are willing to finance to a level which is not helpful to an average business. Very few businesses can survive without a reliable source of working capital, so this change promises to receive the highest priority from most small businesses. To replace the disappearing commercial lines of credit, the most practical options for business borrowers include working capital loans and merchant financing from one of the alternative commercial finance sources still active in small business financing programs.Another business lender change is illustrated by the difficulty of locating investment property financing. An increasing number of banks will make commercial mortgage loans only when the commercial property is considered to be owner-occupied (which means that the commercial borrower occupies a substantial portion of the building). Commercial properties like apartment buildings and shopping centers are often owned by investors that do not occupy the property. For many banks, it appears that they are currently restricting their commercial lending activities to those which qualify for SBA loans (Small Business Administration) which generally exclude investor-owned situations.A third significant business lending change is demonstrated by revised guidelines for refinancing commercial real estate loans. In almost all cases, commercial lenders have dramatically reduced the loan-to-value percentages that they will lend. In some areas and for specific types of businesses, many banks will no longer lend over half of the appraised value. The difficulty for a commercial borrower refinancing an existing commercial loan reach a crisis level very quickly when this happens. In many cases the original business loan was based on a much higher percentage of business value than the bank is currently willing to provide. When a current appraisal reports a decrease in value since the original loan was made, the lending problem is further compounded. This outcome is especially common in the midst of a distressed economy which leads to decreased business income that in turn often produces a lower commercial property value.For a fourth commercial lending change example, many small business owners have already discovered an inflated fee structure from most banks for virtually all small business finance programs. Perhaps the bank perspective for some of the commercial financing fee increases is that they need to find a revenue source to replace the diminishing income from small business loans which has resulted from bank decisions to decrease commercial loan activity. Except for unusual and unavoidable circumstances, business borrowers should seek different commercial funding sources when they encounter suddenly increased business financing fees levied by their current bank.Banks changing their overall guidelines for small business financing produce a final and widespread example of commercial lender changes. Many banks have effectively stopped making any new commercial loans to small businesses regardless of business income or creditworthiness. Unfortunately these banks are not announcing publicly that they have discontinued small business finance activities. This means that while they might accept business loan applications, they do not intend to actually finalize commercial financing in most cases. Whenever it becomes obvious that the bank has no real intentions of making a requested working capital loan or commercial mortgage, this approach has clearly frustrated and enraged business borrowers.The five commercial lending changes described above are unfortunately the proverbial tip of the iceberg. As they approach business lenders to obtain commercial real estate financing, working capital loans and small business financing, business owners will need to be especially skeptical and diligent.
Tag Archives: personal finance
How to Finance a Franchise
Whether you write a personal check, use the equity in your home, use your 401K money or get a commercial loan, one way or the other, you’re financing your franchise. Financing it the right way is critical to your long term success. It might not be as critical as finding the right locations, but it’s close.Generally speaking, in financing your franchise business, you have three basic options:
Option I: Finance it out of your own pocket, either by writing a check from savings, cashing out retirement assets, or some other means,
Option II: Take out a loan secured by your personal assets, such as an equity loan or an SBA loan, or
Option III: Take out a commercial business loan for franchise financing.
Each option has its pros and cons. The best option for you will be based on several different factors, including the goals you have for your new business. One option might be best if your goal is to open a single location, another if your goal is to open several in a given time frame. What follows is a discussion of the various options and how one might or might not be the best one for you. It is our goal to help you make the best decision possible, based on your current situation and on your goals. Options for Franchise Financing Option I: Finance it out of your own pocket If your objective is to open only one location and you have the liquid cash to open it and get it to profitability, this is not a bad choice. You will lose the interest earned on your money, but avoid the interest cost of borrowing. If you plan to open more than one location and have the resources to get them all to profitability, again, this may not be a bad choice.However, if you have the resources to open the first location, and plan to rely on using cash flow from the first one to open the second, third, etc, be careful. Remember, if you have cash in the bank or equity in your personal assets, you can always use that for working capital or expansions later. If you plan to rely on commercial financing at any time, financing the first one is what gives you the greatest flexibility.That’s the downside of this option. Having your personal money tied up in a business limits your flexibility in the future. You may or may not be able to take advantage of a future opportunity when it comes along. Many books are available that discuss the value of using OPM (Other People’s Money) in opening and growing a successful business.Option II: Take out a loan secured by your personal assets This Option provides greater flexibility than Option I. Your liquid assets remain liquid giving you the ability to respond as needed to changing business requirements. The net, after tax difference between interest earned and interest paid can be low making this a viable alternative to Option I.The downside of this Option comes in two forms: (1) tying up the personal assets you pledge as security, and (2) the true, all-in cost of the financing.Tying up your personal assets limits your choice and flexibility in the future. As an example, we recently funded a 2nd location for a certain franchisee. He had taken out an SBA loan for his first location using his home a security. He knew the lender was also filing a lien against his first location but no one thought this would be a problem since we planned to secure our loan with only his new location.What we discovered during the title search was that when the original lender filed their lien against the franchisee’s business, they listed the location they were financing and included the phrase “all future locations” in the lien filing. Those three little words meant that any and all locations this franchisee would open at any time in the future were going to be considered security against his original loan! We were eventually able to resolve this but needed to negotiate a subordination agreement with the original lender.The lesson here is to be very careful about what the lender actually uses as security on the loan because it may limit your options in the future.In terms of the true, all-in cost of the financing, this can be a complex subject. Unfortunately, some lenders like it that way. They will quote a low interest rate but not the points and loan fees involved. They won’t take the time to educate a borrower on the differences between variable rate financing and fixed rate financing. They won’t fully disclose all the charges that are incurred during the life of the loan.The lesson here is to get everything in writing and review it with a trusted advisor. Most reputable lenders will issue a proposal or term sheet that includes detailed information about payments, fees, terms, security, etc.Option III: Take out a commercial business loan for franchise financing. This option tends to offer the greatest flexibility to most franchisees. Franchise loans are typically secured only with the assets of the franchise, leaving all personal assets unencumbered. Pay close attention to what franchise assets are being used as security (See the story under option II).In terms of the true, all-in cost of this type of financing, as we mentioned under Option II, this can be a complex subject. All of the items mentioned in connection with Option II apply here with option III. Get proposals in writing, review those proposals with a trusted advisor, and make a fully informed decision.About InSource Capital Services, Inc. We specialize in franchise financing. As proud members of our local Better Business Bureau and the NAELB, we promote and subscribe to a Business Code of Ethics. We are committed to “raising the bar” when it comes to fair and honest business dealings with all of our clients and business partners.Features of our Franchise Financing programs include:
Fixed rate loans to 84 months
No outside collateral, other than the assets of the franchise and your good credit
Pre-Funding, we can pay your Vendors directly
Credit approvals in as little as 5 working days.
Our commitments to all members of the franchise community include:
Fast Turnaround Times
Clear Answers to your Questions
Competitive Rates
Honesty & Integrity
Finding a Way to get the job done!