Exploring Franchise Funding Options with Eric Schechterman of Benetrends Financial

One of the first questions prospective business owners typically have when starting to explore franchise opportunities is— what are the options for funding? On this episode of Atlanta Franchise Today, host Leslie Kuban, owner of FranNet Atlanta, reviews available franchise funding solutions and what you need to know about them, with Eric Schechterman, the Chief Development Officer for Benetrends Financial.

Transcription: 

Leslie Kuban:
Eric, welcome to the show. Really great to see you and delighted to have you.

Eric Schechterman:
Thank you for having me.

Leslie Kuban:
Eric, just tell us a little bit about your story before we jump into funding. Tell us about your story in franchising. How did you get started?

Eric Schechterman:
Definitely not the traditional one. I graduated college and went right into the workforce of new business, cold calling, banging on doors, sales for an amazing company named Cintas Corporation, where I learned a lot about culture and sales strategy. After moving seven times in three years, I reached out to a recruiter friend of mine and they said, “I know of a job that they’re looking for a new sales manager. It’s at this company Benetrends Financial. They help people get financing for franchises.” Never knew what a franchise was beyond Wendy’s, Burger King, McDonald’s, all the places I ate. Joined Benetrends in 2011 and got brought into this amazing world that I never knew exists and I can’t picture myself leaving. That’s really how it all happened.

Leslie Kuban:
Benetrends, in the industry is one of the most well-known and respected brands for franchise and business funding. But for our viewers who have never heard of Benetrends before, tell us a little bit about your company. What you guys do for new franchise owners.

Eric Schechterman:
Yeah, it’s a pretty outstanding story. Our founder, Leonard Fisher, who spent his entire career as a tax specialist, a tax attorney back in the early ’80s, started to look at different tax law, which I guess attorneys that are tax attorneys like to read and see how it works in their world. Pretty much came up with a structure known as rollovers as business startups, which allows people to access retirement funds to fund a business without tax or penalty. When he started doing that, it started to grow in popularity and grow in usage. Then it started to really gain popularity in the early 2000s as we went through the financial crisis and the housing crisis and entrepreneurship exploded in the country. Fast forwarding to where we are today, Benetrends has well over 100 employees. We do everything from funding to insurance, to payroll, to hiring, to helping people figure out just what makes sense in their world today, working with business owners of all different kinds. We’ve been doing for 35 years, so it’s a pretty fun place to be.

Leslie Kuban:
Well, I’m sure something new in those 35 years of business operations is navigating COVID, which we’ve all been doing for the last year and a half and still are. Would love to get your opinion, Eric, what’s the general state of the union for funding for new small businesses while we still navigate COVID?

Eric Schechterman:
Yeah, one of my favorite things I always would say, the banking industry, the favorite answer they ever give is it all depends. That’s been coming up a lot, but I will tell you from my perspective, it never got as bad as I thought it would as far as funding in the environment and it rebounded and expanded a lot faster than I thought it would. I think if anything, COVID brought to the lending industry, which we already saw was happening, were different flavors of appetite being focused on, different silos. When people think of lending and they think of mortgages, a house is a house. In small businesses lending isn’t the same for everybody. You saw a lot of lenders that still want to put money out there but it was, “We’re looking for this loan size, this type of industry.” Other lenders, “We’re looking at this one.”

Eric Schechterman:
What people don’t realize, if you don’t fit into that little box that they’ve built, they might not do your loan, but it has nothing to do with your business being a bad idea or a bad opportunity. It just means it’s not the right bank, but unfortunately they don’t always share that message. I would say that the best part is you have a lot of lenders coming to the forefront because of what the government did for the stimulus package, increasing the safe holds for banks putting money out there in small business. But you have a lot of those different pockets of where people are coming and inconsistencies. It’s just really helpful to help people navigate what the right message is and where to go.

Leslie Kuban:
That just underscores the need for particularly someone who’s new to this and never looked into this before, the need for a funding advocate. Just walking into the bank at your local grocery store and asking information about a small business loan is probably not going to lead to a very productive end for that new entrepreneur. Yes, I’m seeing that as well, that the banking system is getting more particular, they’re upping their requirements. It really, like I said, underscores the need for people to get help and to navigate those ever changing waters.

Leslie Kuban:
What are you seeing as the top two or three funding methods that are available to most people who want to start a business right now?

Eric Schechterman:
Well, I think SBA probably tops the list. For those that don’t know, an SBA loan is a Small Business Administration loan and it’s not actually the government lending the money. It’s still banks and a banking decision, but what banks are doing is by participating in the SBA program, they follow the terms and conditions set by the government to get some guarantees from their end and it creates some great opportunities for borrowers. That is on the top of minds of a lot of people due to some things that the stimulus package did to create more opportunity. So I would say SBA loans are probably the most talked about it. It ends up not always being the best option, but that seems to be the word that’s on the tip of everybody’s tongue.

Eric Schechterman:
I think people forget, even though we’re 10 plus years removed from it, that it’s not 2008 and ’09 anymore and people have equity in their homes. I think for those that actually look into obviously where the housing market is, most places in the country, we know where the pricing on homes are going and the rates on home equity lines of credit are down. So it’s a great opportunity to do that. And most people don’t realize most SBA loans will use the equity in the home as collateral. So it might even make more sense to pursue it that way at a better interest rate.

Eric Schechterman:
I will say as much as most of the audience still might not know this exists, people accessing retirement funds from previous employers, IRAs that they’ve rolled over, continues to be a huge area of popularity, because I always like to call it one other thing; it’s pre-tax liquid that people have access to. I would say in my world, that’s one, two and three and maybe a three A would be people leveraging a stock portfolio, almost like a home equity line of credit. Those would probably be the top four right now.

Leslie Kuban:
I see my clients, a lot of them do explore a home equity line of credit when it is suggested to them and they find a lower interest rate and quicker access to their dollars without the rigmaroles of a business loan and without all the fees and closing costs that get tied up into a small business loan many times. Likewise, with the rollover strategy, I’d say at least a third, maybe even a half of the folks I work with are using that in part or for all of their funding needs for their business. It might be the equity injection they need for their SBA loan.

Leslie Kuban:
But what I find a lot with people is when they start learning about and exploring in particular, this rollover strategy, they’ve never heard of it. They go to their CPA, they go to their wealth advisor and they really aren’t familiar with it either. That’s usually a conversation that needs to be had. Oftentimes when a candidate’s CPA or their financial advisor then gets on the phone with you and your team, they have a much better understanding of it. But can you walk us through just for our viewers that have never heard of this and may be interested in this as a funding tool, just how does that work? And how do you engage with people’s professional advisors to get comfortable with it?

Eric Schechterman:
I’d be happy to. I think for the audience, I think they would always enjoy and I know a lot of the candidates that we’ve worked with enjoy this. Chances are you’ve already done rollover funding in your career. You just didn’t realize it. I think when it’s positioned as this rollover, as this business startup and accessing, people start building up their head stretch before they get anywhere else. Really what I tell people is, if I’ve ever worked for a company and had an employee retirement plan, and I left that employer and I rolled that money out of my previous employer to my new company that I went to go work for, or to an IRA outside of it, as many of the people that are listening know, you don’t pay any taxes or penalties to move those funds from one plan to another. I always say that’s one pillar of the two of how rollover funding works, is moving funds from one employer’s plan to another.

Eric Schechterman:
If I’m working at Microsoft and then I decide to go work at Apple, I can take my money from my previous employer and roll it to my new one. Now, whether I’m an Apple, Microsoft, GSK, Mobile, Exxon, any employer that most people have experience with, as most people know you have different investment options within a company sponsored retirement plan. I could buy stocks, bonds, mutual funds through Fidelity, Schwab, Merrill, whoever. And quite often, one of the options is to be able to buy stock in the company that’s providing and sponsoring the plan. If I work at Apple and I have a 401k there and I have $200,000 in it, and I decide I’m going to put $100,000 in traditional and I’m going to take the other $100,000 and put it in Apple stock, as I’m going through this, most people are like, “Okay, I’ve done this,” or “I know this,” but they never realized the chain of events that sets off because it wasn’t real money to them.

Eric Schechterman:
In reality, when I took that $100,000 from my retirement plan, I bought however many shares of stock I could and now my plan owned those as its investment. Where the big aha moment is, is realizing that the way you got those shares is that your retirement plan used real money. It’s liquid cash to buy those shares and where did that money go? That went right to Apple. It went right to their corporate checking account and they can use it however they see fit. Payroll, working capital, acquisition, salaries, bonuses, whatever. You didn’t lend it to them, they didn’t owe it back to me. It was Len Fisher who he always makes a joke. He said, “Eric, I didn’t invent rollover funding. This existed since the ERISA code of the early ’70s. I was just the first to realize you don’t have to be Apple or Microsoft to do this. It’s just about corporate structure and plan design.”

Eric Schechterman:
In reality, Leslie, all an entrepreneur is doing is they’re creating a new company for their business that has a retirement plan design that allows for that plan to invest in the company providing the plan, which by the way, is their company. And through doing that, they fund their business, no tax, no penalty. It’s not a withdrawal, it’s not a loan and you’re creating pre-tax liquid to make the best investment that you could; in yourself.

Leslie Kuban:
This roll over plan, it is really tied to ERISA employment law and that’s the piece where most people’s CPAs or wealth advisors, that’s not the business that they’re in and there’s an education need and opportunity there with candidate’s professional advisors on how they’re funding their business.

Leslie Kuban:
Let’s go back to SBA for a minute, Eric. For some people, that’s their preferred and most beneficial choice of funding. What kind of qualifications are the banking system looking for right now for a borrower to qualify for an SBA loan?

Eric Schechterman:
Yeah, I would say some of the things are very basic, just like all other lending products out there, where credit score, character, background, payment history. I would say in this environment, anything below a 700 credit score or FICO scores, probably you’re going to have to make up whatever gap is there with some other strong assets or qualifications. I would say, and I’ve made this speech a few times and not to belittle the point, but I would say three things matter most when pursuing an SBA loan: liquidity, liquidity, and liquidity. I know it’s a bit of a joke, but it’s really not because the lending institutions, when they talk about liquidity, it’s really about a term that they refer to as post-closing liquid.

Eric Schechterman:
And that is the idea, after Leslie buys a business, pays what she needs to get the loan and make her personal investment, how much money does Leslie have left over so that she is making good business decisions and not pulling money out of the business before it’s able to support it? And that she’s not using the loan proceeds to possibly cover her personal living expenses. A good rule of thumb is that a lender typically wants to see about eight to 10 months worth of post-closing debt coverage left over in liquid. Very interesting thing I see people run into is qualifiers for SBA loans are pretty much just that, they’re qualifiers. They’re not amplifiers. I get a lot of time, “Well, I have perfect credit. I have this, I have that, so I should get a lower interest rate.” The interest rate and the offers and the terms, they’re pretty consistent in the small business banking industry.

Leslie Kuban:
The message here folks, is to begin your funding education early in your entrepreneurial exploration. Eric, let’s talk a little bit about franchises in the funding world. Are there certain categories of franchises or industries that are more favorable for funding or is it a fairly even playing field for different kinds of franchised industries?

Eric Schechterman:
Yeah, you know what, the challenge is also the benefit of what I said earlier of while there are banks that are siloed and like to only focus on certain categories, almost all categories are covered because of that. Because it’s not just everybody does everything and maybe you start to cherry pick. There are certain banks that’ll say we really like fitness, or we really like food, or we really like service. And if they do, they have a big appetite for that and they take them all on. I mean, I did not see one category, one industry get overly affected through COVID, in it, even coming out. I would say, if anything, it was more of location. Are you in an area that’s more closed down than another and what’s going on there? But there’s a bank for a lot of things like that.

Eric Schechterman:
Now, of course it’s got to be a legal process and be SBA approved. We get questions all the time about marijuana and certain things. It’s not federally regulated so you can’t get a federal SBA loan for certain things like that. But I did see the appetite grow from the lenders in franchises in general. Lenders are more attracted to that type of business, unfortunately versus just the independent startup model.

Leslie Kuban:
What drives that, Eric? Are there some obvious reasons why certain banks may be more favorable to franchise types of businesses versus independent businesses in the same industry? What drives that?

Eric Schechterman:
People always want to complicate the lending world. I actually think it’s very simple and a lender likes something easy. When I say easy, what’s on the back of the minds of every lender is if there’s a default, the way I get my government guarantee where a percentage of that loan is backed by the government, is I submit that to the SBA auditing department where they audit my lending decision. If my loan is predicated on that auditor, what do I want to show them? Look, they’re one of 300, they’re joining a brand that’s already done this and this. By the way, we’ve already done 50 of these loans and here’s one where I think it can work and I hope that it does. They like easy and having all of the information that’s disclosed within the franchise industry makes their job easy.

Leslie Kuban:
Another way to say that is risk mitigation from a banking perspective. Eric, as we wrap up here, tell us, any predictions that you have for franchising for the rest of this year and next year? What’s ahead in your opinion?

Eric Schechterman:
In my opinion, and I’m an avid Shark Tank watcher. My son and I go back and forth of who our favorite shark is. But I always listen to Mark Cuban every now and then. I very much remember early on where he predicted that what you would see within the economy with the businesses ownership is that it was going to be a V. It was going to go here, down, hit that little bottom point and then, boom! I think we’re probably, if you took a V and a U and combined it, where we went down a little bit. I would tell you for Benetrends, we have exceeded our pre-COVID numbers through the first two quarters of the year, this year. I think between a lot of pent up demand is what we’re seeing now.

Eric Schechterman:
One line that Len Fisher always reminded me when we’re working with buyers who you’re seeing the urgency, there’s a lot more good buyers out there than there are good businesses. For those people that are sitting back and waiting for that perfect opportunity, others are saying, “This looks pretty good, I’m going to jump at it,” and now you’re starting to see that. I think in franchising, in the explosion of service based and what people have realized we can do from home, technology and what companies need now, all of these new appetites that have been created from COVID, I think are really going to impact a continued growth within the franchise industry.

Leslie Kuban:
We’re already seeing some really cool new brands coming forth, or brands that have completely re-engineered their model to service their customers in new and cool ways. So I agree with you, I think we’re going to have a lot of good stuff ahead. Eric, this has been a great conversation. It’s great to see you again, and I really appreciate you coming on the show. Thanks for being here.

Eric Schechterman:
Oh, it’s my pleasure. Thank you, everybody.

Leslie Kuban:
Folks, it was great to have you. Look forward to seeing you next week on Atlanta Franchise Today.

The Atlanta Small Business Network, from start-up to success, we are your go-to resource for small business news, expert advice, information, and event coverage.