SBA Lending Options for Franchise Owners

Introduction

Patrick Findaro, co-founder of Vetted Biz, hosts today’s guest, Dave Ruby, a seasoned SBA lender. Dave has over 20 years of lending experience, with a specific focus on SBA loans for the past decade.

Dave has been a banker in the St. Louis market for 20 years, starting his banking career in college, transitioning from retail and commercial lending to specializing in small business SBA lending about eight years ago. He currently works for the Bank of Houston, a small community bank focused on SBA lending.

SBA Lending and Community Banks

Background in SBA Lending

Dave shares how he transitioned into SBA lending during the last economic downturn. He saw an opportunity to help people buying or starting businesses, especially baby boomers looking to sell their companies. His attention to detail and the unique opportunity in SBA lending drove him into this space.

Community Banks vs. Big Banks

Dave highlights how smaller community banks dominate the SBA lending space, as they are more dedicated to helping small businesses. Larger banks often avoid specific industries, such as startups and restaurants, due to internal policies, while smaller banks like Dave’s are open to financing a wider range of businesses.

When to Contact a Lender

Early Engagement

Dave advises prospective franchisees and business buyers to engage with a lender early in the process. It’s beneficial to establish a relationship with a lender who understands the goals and financials before signing agreements or making major decisions.

SBA Loan Process

Application Steps

1. Initial Conversation Start with a discussion to evaluate the opportunity.
2. Financial Submission Once the financial checklist is submitted, the process moves forward quickly.
3. Commitment Letter Typically, a commitment letter is issued within a week to a week and a half after receiving all necessary documents.
4. Funding Timeline From the commitment letter stage, it generally takes 45 to 60 days to finalize funding.

Delays in the Process

Third-party factors like lease negotiations or life insurance can slow down the process. Dave recommends addressing potential issues early to avoid delays.

Loan Amount Threshold

Minimum Loan Size

The low-end loan threshold is typically around $150,000 to $200,000, given the labor-intensive nature of SBA lending. Dave notes that loans below this amount may not be feasible due to the resources involved.

Franchise Resales vs. Startups

Easier Financing for Franchise Resales

Financing a franchise resale tends to be easier than a startup because there are historical financials to analyze, making it simpler to determine cash flow and loan amounts. Startups require more scrutiny, as they rely heavily on projections.

Addressing Overpriced Businesses

Dave frequently encounters sellers overpricing businesses, especially in the current rising interest rate environment. In such cases, solutions include injecting more equity, lowering the sale price, or having the seller carry a portion of the debt.

Common Challenges and Opportunities

Red Flags in Business Acquisitions

Key issues arise when buyers don’t fully understand the customer mix or working capital needs of the business. Dave recommends getting detailed financial information to avoid surprises.

Opportunity in Struggling Businesses

For sophisticated operators, there may be opportunities to acquire struggling franchises or businesses, particularly in industries with high default rates. Dave has helped operators successfully acquire underperforming franchises and turn them around.

Advice for Small Business Owners

Securing Funding in a Challenging Environment

For business owners struggling to secure funding, Dave suggests building a strong relationship with an SBA lender. SBA programs can assist businesses during tough times, such as refinancing high-interest debt into more manageable long-term loans.

Final Thoughts

Dave emphasizes the importance of cash flow and prudent financial management in ensuring long-term business success. He highlights opportunities for buyers to improve existing businesses through operational efficiencies and sales strategies, especially when acquiring businesses from retiring baby boomers.

For those interested in SBA loans, Dave encourages reaching out early in the process for guidance on financials and potential issues before engaging costly professionals.