Underwriting the Franchise Borrower – Collateral

Jessica SarterSmall Business Lending

Video Transcript:

Mike Rozman:
Let’s shift to collateral for a moment, and you know, I think the SBA rule is real simple here. And, Eric, can you join in? And on the collateral side of things, US Bank and – within the SBA business, what’s your view of collateral?

Eric Daniels:
We follow SBA guidance in terms of if collateral is available we’ll need to see that injected – or excuse me, pledged to the transaction. So we again are fairly consistent with SBA. I want to just take a second with regards to injection to share a little bit what we do. We’re at around the 25 percent on the startup, and we go down to 15. We do like seller carryback. I think – I’m not certain and I’d be curious to hear from the crowd in terms of their philosophy on that. For us having that into the deal is very helpful in terms of transition.

The other piece that we on occasion are ____________, and on those, depending ________ the business, we can require up to no injection on that transaction.

Mike Rozman:
I appreciate that, Eric. One of the things that we’ve chatted about earlier is, even within the SBA rules – the SBA’s clear if collateral’s available it needs to be pledged. Kevin, Atlantic Coast Bank, you know, when you think about collateral that’s out there, tell us what you’re seeing on the personal financial statement and the level of details you guys are going to make sure you’re being compliant there.

Kevin Ellis:
Yeah, we’re definitely seeing heavy scrutiny on the PFS in regards to liquidity, in regards to disclosure of other assets. In fact, you know, I’m seeing a much higher level of, you know, having to take – if there’s excess cash, for example, you know, that could be pledged, you know, marketable securities, even down to small balance. So there’s definitely heavy scrutiny on the PFS.

Mike Rozman:
_______ I appreciate that. And so – and I’m getting questions and I appreciate these questions, to our audience who are submitting questions. We’ll try to incorporate this into the conversation. One of the questions is let’s understand, you know, what’s being done in SBA, what’s being done outside of SBA. Doug, as a non-SBA lender, as a conventional lender, tell us your view of how are you viewing collateral today.

Doug Bagnasco:
Sure. We are a conventional cash flow-based lender, and you know, the first thing I want to clarify is when I was talking about 100 percent financing for new builds, that would be 100 percent financing of lease holds and equipment. Typically our borrowers would handle the working capital as well as franchise fees. So in the end it really comes out to about 80 percent of total project costs and 100 percent of lease holds and equipment. So I just wanted to clarify that.

Mike Rozman:
Okay, thanks.

Doug Bagnasco:
Sure. In regards to collateral, the way we look at collateral is as a conventional lender we’re not bound to take equity in residences or commercial real estate just because it’s there. So we actually never look at real estate as collateral across the board. We are strictly a non-real estate lender, and the way we’ll look at it is we look at the cash flow of the operating units that we’re going to have UCC-1’s against, and then we use a multiplier to determine an enterprise value, and the multiplier can vary. It’s typically a multiplier of _______; sometimes it’s a percentage of revenue or a multiplier of revenue. Whatever that enterprise value is that we’re going have – for the stores that we’re going have UCC-1’s against, we look to be at about an 80 percent loan to enterprise value. So typically if there’s, say, a five-store operator out there and four of the stores came on board in the last year or so, in all likelihood getting to that 80 percent loan to enterprise value would require some injection on the borrower’s side. In the scenario where there’s a lot of cash flow from units that have been operating for a while, in all likelihood we’ll be able to get up to that 100 percent financing.

Mike Rozman:
Okay, I appreciate that. And one of the questions that we’re receiving, Doug, is – and I think people understand where SBA pricing is from a rate perspective; that’s obviously well understood in the market. On the product you’re talking about, can you give a sense of where pricing is from a rate and structure standpoint?

Doug Bagnasco:
Sure. First and foremost is we’re talking about fixed rates for the life of the loan, not variable rates, and the rate range, you’re probably looking anywhere from as low as 7 on refinances – 7 to 7.5 on refinances, and as high as 8 to 8.5 on new builds. And a lot of that depends on our comfort level with both the borrower and the franchise concept.

Mike Rozman:
Yep. And so let’s shift. Let’s stay on the discussion of collateral. I’d like to bring Rob into this. Rob, you’re a leasor. Talk to us about how you view collateral and the role it has and the levels of collateral that you’re looking for in both hard and soft costs.

Robert Rasmussen:
Well, we primarily finance equipment acquisitions; we also do merchant cash advance and working capital. But as far as equipment goes we finance any type POS system up to doing a full re-image, but we look at about 30 percent soft costs, 70 percent hard is our mix.

Mike Rozman:
Great, I appreciate that.