Financial Summit - the Lender's Perspective · • Typically will require deposit and merchant...

Financial Summit• Part II: Understanding the Lender’s Perspective

• Evaluation of the franchise• Variables in decision making• How to enhance the funding package

• Moderator: Brad Fishman, CFE, CEO, Fishman Public Relations

Presenters• Robert Rodi, President, Mt. Pleasant Capital Corp.

• Matthew Christie, Regional Account Manager, CIT Small Business Lending

Bob RodiMount Pleasant Capital Corp

Franchise LendingThe New Challenge

The Past• Plenty of Capital to Go Around• Lots of Qualified Applicants• New Space for Expansion• Easy Credit-Easy Growth• Volume Driven Credit Philosophy• Very Few Obstacles to Growth

The Present• The Window on Capital is Shut Tight• Shrinking Pool of Qualified Applicants• Credit Philosophy is “Operationally” Focused• Obstacles to Growth Everywhere• Less Construction May Cause a Shortage of Good

Locations in the Future

Rest In PeaceWall Street

Here Lies Securitization

The Future• No More 800lb Gorilla

The Future• Lenders Will Be Extremely Cautious.• Risk Profile of the Industry Has Changed.• The Death of the Secondary Market (Securitization) Means that

Lenders Will Have to Focus on Risk as Opposed to Origination.• Franchisors Will Need to Modify Their Qualification Process.• Franchisors Should Consider “Creative” Finance and Risk

Sharing Programs to Achieve Goals.

Where’s the SBA?•Negatives

• SBA Lending is Down 57% from last year• Secondary Market for the Unguaranteed Portion of SBA

Loans has Disappeared• Pre-funding is an “Issue”• Exposure Will be Limited to 70%• Higher Collateral Requirements• Related Experience is Required

•Positives

• Rate and Term

•Rumors• Government May Increase Guarantee Amount

Matthew ChristieCIT Small Business Lending

Current Conditions with SBA…………………………………..………..1

Business Ownership Options Available . . . . . . . …. . . .. . . . . …….2• Factors to Consider . . . . . . . . . . . . . . . . . . . . … . . . ...3• Pros and Cons of each . . . . . . . . . . . . . . . . . . ... . . . .4

Types of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……..6• Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . .7

How to Prepare . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . .13

Where to Go For Help . . . . . . . . . . . . . ………….. . . . . . . . .. . . ...14

Loan Application……… . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .15

Loan Flowchart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .……16• Loan Approval – Timing . . . . . . . . . . . . . . .. . . . . . . . 17

Who is CIT…………………………………………………………….…18

Current Market Conditions with SBA

• The secondary market that packages the SBA loans and sells them has frozen.

• Costs make SBA loans have too little profit to interest lenders.

• Demand by entrepreneurs has substantially declined.

• Start up a new location

• Purchase an existing operation

• Buy into an existing operation

Factors to consider – Start-up

• Accurately project the total project costs

• Equipment• Leasehold

Improvements• Deposits• Working Capital• Franchise Fees• Misc. municipal

requirements

• Choosing a location• Participate with Insurance• Demographics• Local Competition• Break-Even analysis• Projection – 2 years

Importance of a Business Plan

Pros and Cons – Start-up Franchise

• ProsCan design location “your way” within the franchise frameworkNo “surprises” left by sellers

• Disgruntled employees, customers, vendors

• No unpaid creditors

•ConsMust build a customerbase from scratch“start-up risk”

•Lender’s OpinionFollow the Franchisors game plan, use all the resources they provide and always consult your legal and accounting experts

Pros and Cons – Existing Franchise• Pros

The ramp up time is minimal

Immediate Cash Flow

Trained Employees

Loyal customer base

•Cons

Are the numbers what they appear to be?

Why are they selling?

Look for skeletons

Disgruntled employees, customers, vendors, unpaid vendors

•Lender’s OpinionAcquisitions are no less a risk then start ups; do your homework and consult your legal and accounting experts

Types of Financing Available

• Banks - Conventional

• Leasing Companies

• Home Equity & Invest. Portfolio Loans

• Small Business Administration (SBA)

Types of Financing Available

• Banks - Conventional• Most don’t lend to start-ups

• If they do expect:• 100% real estate collateral coverage • 65%-80% financing of the hard assets only

• Typically will require deposit and merchant services as well as personal accounts to be maintained at the bank

• Most will not finance goodwill (business value)

• Leasing companies• Terms vary widely (3 – 7 years on long term hard assets)

• Term typically matches useful life of the asset• Matches a business loan for a business purpose (equipment purchase)• Many have steep pre-payment penalties• Financing is limited to the equipment being purchased

Types of Financing Available• Home Equity & Investment Portfolio Loans

• Very simple process• No flexibility on repayment terms if business hits a rough patch• Business and personal financing should be separated • Issues of tax deductibility may be an issue• Loss of ability to sell the underlying assets

• SBA Lenders• Many are active in Franchise Financing & understand the

nuances• Up to 75% - 85% total project financing available• Longer loan terms than conventional loans• Personal Guarantees required• Outside collateral may be taken when available• Matches a business loan for a business purpose

Comparison: Conventional Loan vs. SBA LoanTypical Conventional Loan

• Equipment Package $100,000• Working Capital $ 50,000• Building Improvements $100,000• Franchise Fee $ 25,000 • Furniture & Fixtures $ 50,000• Misc. Pre-opening $ 25,000• Fees: $ 5,000• Total Project Costs: $355,000

• Borrower Injection*: ($170,000)

• Loan Amount $180,000

• **Down payment based on asset value with advances at 50%-80%

Typical SBA Loan Structure• Equipment Package $100,000• Working Capital $ 50,000• Building Improvements $100,000• Franchise Fee $ 25,000 • Furniture & Fixtures $ 50,000• Misc. Pre-opening $ 25,000• All Fees: $ 10,000• Total Project Costs: $360,000

• Borrower Injection*: ($ 54,000)

• Loan Amount $306,000

• **15% Down Payment

Types of financing available : SBAFeatures

• Longer terms than conventional financing• Financing based on the Total Project not just the assets• No balloons, calls, renewals• No pre-payment penalties (on loan less than 15 years)• One loan on multiple uses of proceeds with a blended term• Loan Rates are based on Prime or LIBOR + Spread (adjustable)• Loans are fully amortized

• Up to 25 years for real estate financing • 10 to 15 years for machinery and equipment• Up to 7 years for working capital

Types of financing available - SBAQualifying criteria

Owner equity or initial investment as little as 15% of Project Cost

Owner actively involved in daily operations

Satisfactory credit history on all principals

Projected cash flow must satisfactorily cover the proposed debt,inclusive of a salary for reasonable salary for borrower

Leased locations – lease term must equal loan term

Additional Collateral may be taken

Loans up to $2.0 million (may be greater with a CRE component)

Types of financing available : SBA• Rates, Fees and Costs

• Loan Rates are based on Prime or LIBOR + a Spread (adjustable)

• What are the Fees Associated with an SBA Loan?• Packaging Fee – typically $1,000 charged by lender• SBA Guarantee Fee - 1.75% - 2.75% of loan amount charged by and paid to the SBA by the

borrower. This fee is typically included in loan.

• What are the costs Associated with an SBA Loan?• Typically the same costs that would be associated with any conventional loan• Construction Loan Fees average 2% of actual build out• Closing Costs (average $3,500; higher if CRE is involved)

• Include: UCC Searches, Attorney’s Fees, Title Work, Name Searches, Flood Searches.

How To Prepare

• Get your financial house in order• Gather your last 3 years of Personal Tax returns• Know where your cash injection is coming from and have it available at the time of

application• Update your resume - focus on your business experience and how it will relate to

running this franchise concept• Create a Personal Financial Statement

• Assets and liabilities• Obtain a recent copy of your credit report

• Equifax, Experience, Transition• Prepare written explanation of any derogatory accounts

• Do your homework on your project• Know your project inside and out• Don’t let lender ask you a question you can’t answer

Where to go for help

• Hire an Accountant & Attorney• Assist with Business Plan• Advise on financing sources• Set up company properly• Negotiate Leases

• Visit Small Business Administration Website (sba.gov)• Service Core of Retired Executives (SCORE)• Free services• Assist with Business Plan• On-line tools to assist

Loan Application and Submission Package

• Loan Application Package• Lenders Application Package (6-10 easy to complete forms)• Three Year Personal Tax Returns from each buyer (20% +)• Detailed Business Plan with Financial Projections (2-3 years)• Copy of lease agreement for the new business location• Copy of the executed Franchise Agreement• Evidence of Injection (borrower cash into the deal)• Copies of the proposed equipment list

Contractor Qualifications• Copies of the proposed scope of the leasehold improvements• Copies of contractor bids with time-lines• Contractor qualification statement

No

YES

No

YESDeal Enters Operations Center

(Sales Support)

Is Package Complete?

(Sales Assistant)

Follow-Up(pkg returned to RAM?)

(Sales Assistant)

Create Documents(Legal)

Collect Due Diligence Items

(Closer)

Loan is Packaged for SBA Submission

(Operations Assistant)

Is Deal Approved?

48 hr Borrower ContactDecision within

10 Business Days (Credit Underwriter)

Review of Credit & Assignment to Credit

Underwriter(Credit Manager)

Decline LetterFinal Customer Statement

(Credit Underwriter)Refund Deposit - 30-45 days

(if applicable)(Operations Assistant)

Coordinate Closing(Closer)

Create Document ChecklistContact Borrower

(Closer)

Order 3rd Party Reportsafter receipt of $$

(Credit Underwriter)

LOAN FLOWCHART

Loan may be withdrawn during this process: Underwriter or Closer prepares Final Customer Statement, withdraws SBA number (if applicable) and Operations

Assistant refunds deposit or bills customer

Invoices processed for 3rd

Party Reports

Reports reviewed and amendments

processed (as needed)

Loan Approval - Timing –

• In Credit• Loan approval within 10 Business Days• Underwriter Calls within 48 hours of receipt of loan application

package• Commitment Letters sent out within 2-4 days of approval

• In Closing• Times frames vary: 30 – 45 days• Closing checklist items to be gathered• Contractors qualifications completed

Started in 19085000+ Employees WorldwideOperations in 50 Countries

NYSE Symbol “CIT”

Who is CIT

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