Feedback: October 2012

by Jack Eberenz | Tom Halter | Mary Ann Miller

Question: Financial institutions are facing issues that range from implementing increased oversight measures to a wariness by businesses of incurring debt to a lack of trust among the general public. Yet a functioning commerce relies on the flow of capital. What do you see as the greatest challenge to business working with traditional funding institutions?

Jack Eberenz
Franchise Integration
Sector: Franchising

My clients are franchisors who have potential franchisees that are seeking funding to start their franchise. Traditionally, the rate of failure for franchisees is much less than for start-up businesses, but we still see that local banking relationships are unable to or unwilling to provide loans. This has encouraged a whole new segment of lending — companies that specialize in finding the right lender and assisting in qualifying the franchisee and qualifying the franchise system on their success rate. A development that is now emerging is private equity funds — ones that are not seeking venture capital-type returns — starting to develop lending programs for franchisees. Their rates are slightly higher than normal banking rates but they make up for that in speed, ease of effort and flexibility, since their loans are not subject to banking restrictions.

Franchisees are today often funded by one or more avenues, including Patriot Express small business loans, U.S. Small Business Administration, equipment leasing, private equity and some franchisor assistance. It’s a complicated new approach and slows down growth and job creation.

Jack Eberenz, president of Franchise Integration, is a nationally recognized consultant to franchisors and has clients from coast to coast. He has more than 30 years’ experience in franchising, at all levels. He serves on several boards of directors; is chairman of the board of one national franchisor; and has clients of all sizes, from start-up franchisors to international companies.

Tom Halter
Gust Rosenfeld
Sector: Law

In my view, the greatest challenge facing businesses is the tightening of underwriting standards by lenders. In regards to trying to obtain a new loan or extend an existing loan, underwriting standards have gotten much more stringent. This means the loan-to-value ratios that the lenders are willing to fund are smaller and equity requirements are larger. In addition, even businesses with a long history of profitable operations likely suffered losses in the past few years and, obviously, it is much more difficult for borrowers suffering a cash burn to obtain new financing or to renew existing financing. Even loans secured by a performing asset may be difficult to refinance in today’s lending environment. For instance, in a loan renewal for a loan secured by commercial real estate, there will almost always be a loan curtailment requirement. The amount of the curtailment will be driven by the decrease in the real estate value and how much more stringent the underwriting criteria have become since the loan was first made.    

Tom Halter is a member of Gust Rosenfeld P.L.C.’s real estate and commercial practice sections. Halter’s practice focuses on real estate transactions and lending. He represents both lenders and borrowers in asset-based real estate finance and other commercial lending transactions. His real estate practice consists of sophisticated real estate projects for individuals, national retailers, developers and institutional clients throughout the Western United States.

Mary Ann Miller
President and CEO
Tempe Chamber of Commerce
Sector: Business Advocacy Group

In many ways, traditional funding institutions and fast-growing companies are looking in different directions. The lenders are looking at assets and history while the entrepreneurs are looking at opportunity and nimbleness. Starting and growing a business is risky at best, and public sentiment toward large institutions has made them even more risk averse. Even when a traditional lender is willing to take a risk, the process is often so lengthy that the peak market opportunity may be lost by the growing business.

This is compounded by the fact that many businesses are considered risky investments by their very nature. A tech company may have an unknown competitor across the globe working on exactly the same product. Even restaurants are risky because of their small margins.

Traditional lenders are really no different from the general public. You have some people who will put their money in hot stocks and others who will put everything into a savings account. Lenders just tend more toward the balanced portfolio. 

Mary Ann Miller, president and CEO of the Tempe Chamber of Commerce since 1999, was named the Local Chamber Executive of the Year in 2008 by the Arizona Chamber of Commerce and Industry. She has more than 20 years experience in marketing and community relations, working in both the for-profit and not-for-profit sectors. She currently sits on the boards of the Rio Salado Foundation, Tempe Convention and Visitors Bureau, and Arizona Chamber Executives.


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