Michael Schonberg from Benetrends is an expert at franchise finance. In this episode we discuss ways that people are funding franchises.


Adam:

Welcome to another edition of the franchise consultant podcast. I’m so excited to have Michael Schonberg here from The Benetrends.

Michael:

Thanks for having me, Adam.

Adam:

So excited to have you on. So, Michael, why don’t just go ahead and explain to people what your company does and what you’ve been seeing in the franchise world in general in the past couple of months.

Michael:

Yeah, absolutely. Adam, so better trends, financial, you know, we are in the business of helping people obtain funding for franchises in a couple of different ways. You know, COVID certainly has affected the way that we do some of our things. But right now, I mean, look, it’s going to create some opportunities for other people. So definitely want to share you know, what we’re seeing in our space. And as it pertains to lending we do have two main programs over here. The first one is going to be known as the rollover for business startups. That is Rob’s program where you can use any pre-tax-qualified money to purchase a business tax and penalty-free. And then we also broker SBA loans over here and work with about 80 different banks across the United States.

Adam:

Cool. So walk me through, I have a lot of candidates that are potentially interested in franchising, but they’re not sure how it works with loans in general. I mean, let’s talk about this in general. So if someone wants to start a business, do they have to put 100% of their money into it? How does that work?

Michael:

That’s a great question. So most of the banks that we’re seeing, especially now with the covert environment, they’re going to be looking for about a 20% cash injection, meaning that they would finance the other 80% of the project. You know, we have banks that we’re working on 10% for that fast track loan, but with COVID right now and everybody focusing on that payroll protection plan. We’re Seeing 20% as a sweet spot.

Adam:

Very, very interesting. And so for people that don’t know about other options besides SBA loans, what other options? Are there other things such as some people that I talked to they don’t realize that they can use their 401 k for franchise financing? Is that is that possible?

Michael:

Yeah, absolutely. And that would be through the rollover program. You know, it’s funny when you talk to people, a lot of times you always hear Do not touch your retirement funds, right, you’re going to get hit with the income tax, and you’re going to get hit with a prepayment penalty as well. One of the cool things about the program is it gives people the ability to invest in a business without paying taxes or penalties on that. If you want, I can kind of walk through a high level of how that works just so people can have a better understanding and see if it might be something that would apply for them.

Adam:

That sounds great, please.

Michael:

Yeah, absolutely. So, taking a step back. This program was created by our founder back in 1982. His name is Len Fisher and he is an ERISA attorney. And he’s the one that came up for the framework for this program. And then about 20 years later, the IRS came out, fully vetted the program, and accepted it as a funding strategy. So good news is it is legal, and the IRS deems it as a compliant funding strategy. The first thing that we do for your candidates is we establish a corporate entity for them to operate the business out of now, the IRS will mandate that for this transaction, it is a C Corp. The reason it needs to be a C Corp is that a C Corp is the only entity that allows a retirement plan to invest in qualified employer securities. I always like to bring that up because sometimes people are a little iffy with C corporations, but it is mandated by the IRS. So we’ll do everything that we need to set them up with a completely new entity. We’ll get them incorporated with the Secretary of State and provide them with all the documents that would come with a new entity. That’s going to be things like their corporate bylaws, their Minute Book, their Ei n number or their tax ID, and then instructions to open up a corporate checking account at whatever bank they choose. So that’s the first step of the process. The second step is designing a qualified retirement plan for the corporation. When we’re looking at it in the beginning, we just need a pre-tax vehicle to move the money into. But when everything is said and done, this is going to be a fully functioning retirement plan that the candidate has complete control of. So as far as the custodial partner that they want to use any investment scheduling if they have specific stocks or bonds that they want to invest in, that’s totally up to that. So after we design that plan, that moves us on to the third step of the process. And this is the rollover portion and this is how we eliminate paying those taxes and penalties all the money. The only thing that’s happening here is that money is moving from one pre-tax account into another one There’s no discernible distribution or taxable event taking place. Therefore, we don’t need to pay taxes on that money. It’s the same thing as if somebody has ever changed jobs and move their retirement account from one job into the next one. There’s no taxable event taking place. That’s the same thing we’re doing here. So we’ll move that money out of their old 401k or IRA. It’ll move into a temporary IRA, and then it’ll move into the new retirement plan that Ben has created.

Adam:

So, Michael, I don’t mean to interrupt you here. But just to make sure my listeners are clear, what happens is it’s not something where you’re taking out a distribution at something where things stay in a retirement account. So instead of investing in Amazon stock, they’re investing in themselves, correct?

Michael:

Absolutely, yes. And that is how we’re getting that money liquid into the checking account. What happens is all that money in the retirement plan does invest in the C corporation, as opposed to just taking it and investing it into your traditional sources like stocks or bonds. Or mutual funds. So that’s really what makes this program works. Once we invest that money into the C corporation, there’s attack cash for Stock Exchange, the retirement plan will purchase the stock of the corporation. And that stock will be valued at whatever amount of retirement funds the candidate chooses. In turn, all that money will move into that corporate checking account, and now can be used for any legitimate business expense. And that even includes being used as the cash injection for an SBA loan if they don’t have the means to fully fund the project themselves.

Adam:

Great, great. And so let’s go back to SBA again, or is the Small Business number one first question is How long is it taking for these loans to go through because it sounds like there’s a lot of PPP money that’s going through the system? I mean, is there a delay now?

Michael:

So yes, the second round of PPP just got approved. What we’re seeing right now is everything. That’s right. related to COVID is taking precedent. So, your ppps and your disaster loans, as well as current clients are taking precedent for these lenders. Now, we do still have a ton of banks that are looking at new projects. But what we’re hearing is it’s getting stretched out a little bit compared to normal. So, when we’re talking about a timeline, we’re talking from getting pre-qualified, all the way to having the funds in the checking account. Altogether, it’s usually about 60 to 75 days. Now we’re seeing it could be as much as about 90. There is a lot of uncertainty with this, but we’re trying to stay on top of all of our letters as much as we can. So we just want to set people up with the idea that it’s probably going to take a little bit longer than what we’re used to be seeing. So, I think 90 days is a really good starting point.

Adam:

And so also talk walk me through I hear that certain loans are now allowing for six months of principal and interest-free, is that correct? as well as SBA?

Michael:

Yeah. So you know, it’s tough. Because the SBA, you know, while it is a government-mandated program, a lot of the lenders kind of do their things. What we are seeing is that the six-month loan forgiveness is working for new loans that are coming into place as long as they’re being processed by September. So right now, if people can get in and get that loan process, yes, we are seeing six months loan forgiveness. And essentially what that means is the government is covering the first six months of those loan payments to help out with their cash flow. Yeah.

Adam:

And how long are these payments? Typically, they go for a typical loan.

Michael:

So normally, it’s a 10-year term with no prepayment penalties, meaning that the candidate can pay off the loan as aggressively as they’d like, and never receive any penalties for it.

Adam:

So I wanted to make it a five-year term, is that possible and then get the first six months free.

Michael:

So it would still technically be considered a 10-year term, but if you paid it off in five years that would not be a problem. And yes, you would most likely get that six months loan forgiveness as well.

Adam:

What is the max that people can typically get off of an SBA loan?

Michael:

So the SBA Oh, fun projects up to $5 million. And I mean, you know, the larger ones are probably going to jump in front of these smaller amounts. But yeah, I mean, as long as it’s over 50,000, all the way up to 5 million, we’re seeing banks that are taking on those new projects.

Adam:

So if I understand this correctly, correct me if I’m wrong here if I were to buy a franchise, and I were to get a loan for $1 million to finance that franchise, then potentially the SBA would give me $50,000 for free.

Michael:

Yeah, yeah, essentially, if that if that’s what the loan payments come out to Yeah, they will make sure that those first six months are paid off. And again, it does vary by lender. But one of the things that we’re doing with the candidates is we’re sending them out to as many banks as possible. So there’s a very good chance that yes, that’s those first six months and that 50,000 would be forgiven.

Adam:

So let’s talk about two scenarios you’ve been in. You’ve been working in this business for quite some time now will tell me about the environment pre six years 90 days ago pre February of 2020 or pre-march of 2020 and talk about what’s been happening since March 2020. How things are different, how are people funding differently? which sort of industries are people looking at? What are you seeing is a big change since the Coronavirus.

Michael:

So I mean, other than the stuff that the SBA is doing just to assist people that are affected by COVID we’re seeing a lot of uptick on service-based brands. You know, it’s, it’s kind of weird, just the way that everything is set up right now. I mean, one thing that’s taking a hit it looks like is fitness concepts just because we’re not allowed to have large gatherings right, so all the gyms are going to have a tough time. But all the service gray space brands we’re seeing a big uptick in and you know, I know a few of those brands that are having an increase in sales. So while some are struggling Others are doing a little bit better. still seeing a good combination of people using the rollover as the cash injection for the SBA loan, people don’t seem to be taking too negatively to the fact that it’s getting pushed out a little bit, just because these things already took a decent amount of time. You know, everybody’s being pretty upfront with the timelines. But, you know, we’re still seeing a heavy combination of both programs being used.

Adam:

How has COVID affected people that are looking to do a rollover, some of them have their lots of things savings in the market, right? Most likely is invested in the market already. They’ve seen their portfolio go down as well. So how does that was that does that mean that people are still interested in rollovers?

Michael:

Yeah, so we’re seeing an interest in rollovers but as you said, the market did take a hit. So the people that were looking to fully fund through the rollover, they might not have the means to do so anymore. That’s why we’re seeing a steady combination of both programs. Another thing that we’re seeing is we have a lot of people that will start the process, but go on hold. And what that means is essential, we would set up the first two steps of the program where we would design the C Corp and that new retirement plan. And then essentially what happens is the account just gets put on hold, so that money can continue to grow, and hopefully, the market bounces back. And that money will grow in their current IRA or 401k. And then whenever they’re ready, all they need to do is tell us and we can simply initiate that rollover portion. So we’re seeing a good combination of those.

Adam:

Also, walk me through I think that a lot of people don’t understand the difference between an SBA loan and an SBA Express loan. What is the difference between these two?

Michael:

So one of the big differences in the timeline in which the loan operates under an express loan is for anybody that’s looking for $150,000 or less, and what happens with the Express loan is a lot of the Cash injection requirements are going to be 10% compared to that 20% for the normal seven-day programs, and it’s going to only be about 45 to 60 days to close compared to that 60 to 75 days. Now, a lot of the banks are shying away from the Express Express loan, I want to be completely candid. It’s just something where if you look at it at a lender, they have the PPP stuff, they have the new COVID disaster loans, and then they see somebody shooting for a loan under 150,000. That’s going to go to the bottom of the barrel. So we are seeing those a little bit less than we used to. Now, you know, from what we’re seeing still, it’s something that’s going to bounce back. It’s just with the uncertainty right now. We’re seeing the banks are moving away from those a little bit.

Adam:

Okay, and talk to me about is are there any specific types of brands that are more likely to get expressed loans approved or not brands but industries would be getting those loans approved more likely?

Michael:

Yeah. So again, a lot most of the service-based brands we work with, you know, there’s a lot of, there’s a lot of interest for the Express loans on those, the 10% down usually applies as well. But again, since it’s so unknown right now, I think people would have a little bit harder time shooting for the Express loan, and it’s all under the 7 am brella. So it all kind of operates under the same program. So basically, all the lenders are saying right now is, you know, everything is kind of standard as far as a timeline. If you’re looking for a loan for 150, or you’re looking for a loan for 500, it’s still gonna get stretched out. There’s nothing that’s gonna, you know, allow people to get their loan in 45 days, and that’s all we want to make sure is that people understand, you know, everything’s changing with COVID. And the banks are one thing that is changing with those timelines.

Adam:

What kind of credit score does a potential franchise investor need to get funded?

Michael:

That’s a great question. Normally what we’re looking for to get somebody pre-qualified is a 680 or above. That’s the minimum that we know that all of our lenders are looking for when it comes to they see a 680 or above, they will automatically jump somebody in and count that as enough credit, even a 675. We still want to see it bumped up a couple of points, a 680 or above, they should have no issues receiving funding.

Adam:

If someone has a bankruptcy, is that ever possible to still get SP funding?

Michael:

So that’s the thing. I mean, normally the bank wants to see 10 years after the discharge. But to be completely Frank, I’ve had somebody come in that was right at the cusp and nine years and they received funding as well. That kind of just goes to the number of lenders that we work with 10 years is the rule of thumb, but some banks will be willing to work on it on a case by case situation.

Adam:

So you talk to so many candidates on a daily or weekly basis. What would you say is the biggest thing that people what was it won’t be the biggest piece of advice you would say for someone looking to explore franchising and looking for funding. What’s the biggest mistake that people make at the beginning of the process?

Michael:

I always think that the biggest mistake is when people undercapitalized. You know, I always think that it’s good to be conservative yet if you have too much money, that can’t be too bad of a thing, but if you don’t have enough, that’s where I find that people struggle. So it’s always important to build in working capital along with the build-out, you know, there are always things that we can do if you get too much money. But if you undercapitalized you’re going to have a lot harder of a time to get the remaining money that you need to fund the business.

Adam:

And you’re seeing that people don’t get enough funding.

Michael:

Yeah, I mean, sometimes that’s the case. You know, I, I see people that will come in with, you know, a range and they’ll shoot low and we always recommend that they shoot high even if it’s not what you’re expecting. I mean, there’s always something that you can do with the leftover funds. So I think that’s important for people To now.

Adam:

Oh, that’s great. Well, Michael, I appreciate you coming on today and talking about what you do. And I always like my guests to let people know how they can get a hold of them. So if someone wants to reach out to you, how do they contact you?

Michael:

Yeah, absolutely. So on if they just go right to the Benetrends website, I have a contact page there. I can work with you to get my contact information out to them. However, we want to share it, but I’m always readily available. If someone wants to call me directly. I can provide them with my cell phone number, which is 215-510-8473. And that’ll go directly to me. So I’d be happy to speak with anybody that would like to learn a little bit more information about the lending environment or just to spitball some ideas off me when it comes to funding.

Adam:

Michael, thank you so much for your time and for coming on and letting these people know about what’s going on in the franchise finance. It’s always exciting and always changing and you’re certainly an expert in the field.

Michael:

Thank you very much for having me on Adam. I appreciate the time today. I hope you and your family stay safe during this time. And again, thank you very much.

Adam:

Appreciate it.

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