SBA Lending 101 – With Heather Endresen

Note to readers: This newsletter is written as a transcript from my conversation with Heather Endresen of VisoCap

What are the core SBA loan products?

The 7A loan is the most common and is a catchall loan product. The proceeds have multiple use-cases including:

• Buying real estate
• Getting working capital
• Starting a new business
• Buying an existing business
• Making leasehold improvements 
• Refinancing an existing business loan

Note that the SBA 504 loan is another common SBA product but it has very specific use-cases, primarily buying or building real estate that’s 51% owner occupied 

I didn’t realize the 504 was that specific, interesting. Are there any resources for franchise buyers to see what brands get funding?

Yes – there is a list known as the FOIA list (pronounced FOY – UH) that is published by the SBA and updated routinely. You can access it for FREE, but it’s quite extensive so you will want to modify it in Microsoft Excel or Google sheets.

Yes I’ve seen the FOIA list, it’s incredible. But there is also a ton of data. Given some will be overwhelmed by it, what should franchise buyers be focused on from a lending perspective?

So you have hundreds of SBA lenders – some smaller, some local, some national.

The most important thing is to find a lender that has the right credit appetite for what you’re looking for.

Getting an SBA loan isn’t like getting a mortgage, every lender has different credit appetites. 

The process (unfortunately) often means that sales reps say ‘yes’ to everything at the beginning for a prospect, but in the process you find out what they’re truly willing to lend.

Okay that’s super helpful to know. So what are the biggest factors of a lender’s credit appetite? 

The biggest factors of credit appetite are typically:

• The amount of money you need
• Whether you have real estate collateral* 
• If you have existing cashflow or starting from scratch 

*A lot of banks require real estate collateral, especially for startup builds. 

The startup lenders are few/far between – and a lot only lend to a concept they’ve already lent with – or if you have enough personal collateral to cover the investment (such as a mortgage). 

These are always considered the highest risk investment for lenders, whereas acquiring businesses with existing cashflow are considered far less risky.

That’s super helpful to know. Given that the biggest hurdle for many people is having enough capital or even collateral, what can they do if they lack the sufficient funds for a startup loan?

Startup builds are considered to be among the most risky of all SBA loans, and therefore, most lenders want the borrower to have personal collateral to secure the loan.  

Personal liquid assets may help overcome the lack of real estate collateral – meaning funds held in checking or savings and marketable securities.

Generally, 401K or IRA funds are not considered unless the borrower would be putting those into the deal as their equity through a ROBS.

There are some exceptions to all this, such as where a lender feels particularly comfortable with a certain franchise concept combined with the prior business experience of the borrower.

But overall, that is a big hurdle to overcome. 

What are the typical interest rates in today’s credit environment? Aside from The Fed changing interest rates, how much does it vary based on the individual?

Interest rates can vary by as much as 3.5% from the highest pricing of 11.5% (or Prime Rate + 3%, variable) to the lowest of around 7.8% at a fixed rate.

The more risk that lenders perceive in a deal, the higher the rate, and vice versa.

How often do borrowers pay the interest?

SBA loans are almost always repaid as principal and interest on a monthly basis using the same amortization calculations that are used in mortgage lending. 

This keeps the payment amount equal throughout the loan with more going toward interest than principal in the early years of the amortization.

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FRANCHISE HEADLINES

New York Fries Comes Home After Decades Abroad

After leaving its namesake city nearly 40 years ago, New York Fries made its return with the opening of its Roosevelt Field, New York, location. Its time in Canada proved the concept has staying power, and its parent company Recipe Restaurant Group is confident in mirroring that success in the United States.

Founded in 1983, New York Fries originally only featured no-fuss, hand-cut fries. As a successful snack brand, it caught the attention of Canadian entrepreneurs and brothers Jay and Hal Gould. The pair bought the brand after its first location in New York closed, making it a Canadian-exclusive brand for years. 

Retro Fitness Adds to Leadership Team with New CMO Tim Schroder

When it came time to hire a new Chief Marketing Officer, Retro Fitness decided to be creative and look for someone outside the fitness industry who could bring a different outlook and new ideas to the role. And when CEO Andrew Alfano met Tim Schroder, he knew it was a great fit.

“Tim has extensive experience directing strategic marketing for big, household-name brands,” said Alfano. “He’s just the kind of pro we need to head up our marketing efforts.”

Schroder joined the company as CMO in November 2023, bringing more than 25 years of experience in managing multi-unit restaurant and retail franchise corporations. He most recently served as Chief Sales & Marketing Officer for St. Louis-based Save A Lot Food Stores, directing strategic marketing and retail operations.