Pete sits down with Eric Schechterman, the Chief Development Officer at Benetrends Financial to talk about how his company helps franchisees fund their locations.
During the podcast, they discuss new initiatives due to coronavirus and what the future might be for franchise funding.
Pete: Well, I'm really excited about today's podcast. I have a great guest, somebody I've known for a very long time. And a financial expert in franchising financing or how you fund your franchise business.
So I'm pleased to welcome Eric Schechterman here, he's with Benetrends financial services, he is the chief development officer. So welcome, Eric.
Eric: Thank you for having me, Pete; thank you, everybody, for listening.
Pete: I was saying before we started, you look awesome. You've been working out all that kind of stuff? And so some people have made this COVID-19 really a way to change and get healthier, and then there's me. So how much weight have you lost?
Eric: It's a little over 60 pounds since I really started the contest, so it's been a fun little journey.
Pete: You are amazing, you should be very proud of that. You look awesome.
Eric: Thank you. COVID has really challenged it, but we're holding strong.
Pete: Holding strong, well good job. Well, let's start from the beginning, right? I always like to get a little background. So how did you get started in kind of the financial services of franchising?
Eric: You know, it's probably a story not unlike a lot of people that even get into buying a franchise. I worked in corporate America on the sales and leadership side for a company named Centos Corporation. Anyone knows Cento's big white trucks, blue lettering on the side. Shirts, pants, mats, mops, and toilet paper so very glamorous stuff.
And after moving, I think seven times in three years for different sales opportunities within the company; this was a right around 2008-9-10 time, corporate changes happening, positions being eliminated. And just really had an opportunity to say should we look for something different.
And a recruiter friend of mine said, I've got this company in North of Philadelphia that helps people finance their business with their retirement funds or other type of funding. I don't know what they do or how they do it, but they need a sales manager. And I literally went on an interview.
My first interview Pete you'll know, this was with a gentleman named Steve Stovall; he was literally interviewing me. And at that point, I thought franchising was McDonald's, Burger King, Pizza hut, never knew what a franchise consultant was, never knew this. Took that position and pretty much found a new family, a new passion, a new industry. And it's been ten years since that time.
Pete: You got to be very proud of that, ten years.
Eric: Yes.
Pete: All right, so you've worked your way up the ladder, now you're running the organization, which is absolutely amazing. So when we talk about Benetrends, they've been around a long time, haven't they?
Eric: Yes. The founder Leo Fischer started Benetrends back in 1983, actually.
Pete: Yes, absolutely. And they're probably one of the elite companies, right? There are a few elite companies that focus on helping franchisees and franchisors fund the businesses, is that correct?
Eric: Yes. Benetrends, as much as we would love to be the only one, we realize that there's other organizations that do what we do. But all of them do a great job. I mean, as you know Pete, there's a flavor for everybody.
And knowing the brands and being in it for 30 plus years, and having clients that have done well, exited the business, bought more licenses, bought more brands, working with consultants, and seeing the growth of franchise brands emerging small, big.
But yes, there's a number of different opportunities that are out there and a number of companies that have all different types of funding programs. But yes, we're very happy to have a position of being one of the more well-respected brands.
Pete: Absolutely. What separates you guys from the other funding companies?
Eric: I hate just being the broken record on well; we've been doing it the longest. I almost get upset sometimes when my sales team says that; I say, hey, that's the feature, but what's the benefit? Like what does that mean? And we've always said if all we've ever done is help somebody get their funding when they first start the business, and that's all we've ever done.
We have not done our job. Getting the funding is the easy part. But what happens on the end of your first year and your first tax filing, and how you're using that within the confines of how you funded the business. Your retirement account, all your different options there. Five years down the road, are you buying more? Are you turning it over to a friend or a family member? Just knowing all those interactions and what you learn over 30 plus years.
I remember reading a book once where a gentleman said after I did my first hundred, I thought I knew everything. After I did my next thousand, I realized how little I knew then. And then thought I knew everything, and then, of course, he continues to go. So 30 plus years, I think we have funded at this point over 17,000 entrepreneurs in our history. And it's what you learned through that, it's probably the ultimate separation.
Pete: Yes, absolutely. No, that's great. So let's talk a little bit about today, right? So you guys have been doing this for a long time, and then we have this thing called COVID-19, right? So tell me a little bit; I mean, certainly, we're all going through this over the last 120 days or whatever time period it's been.
So tell me a little bit what you're seeing in terms of the lending side; maybe we'll start with the SBA. There was a lot of part with the cares act, they had some special programs, and they're putting a lot of money through the SBA. So tell me a little bit about the climate as it pertains to access to money, and then how to get that. So let's start with the SBA.
Eric: Yes. I mean, SBA it's a fantastic program, it's been fantastic for all small businesses. But has really had a good sort of marriage almost with the franchise industry in the last few years of just being the real track that people will pursue as far as pursuing lending for small businesses. I would say once COVID hit, probably the most immediate changes that happened is everybody turned on the news; they all heard what the PPP program was. And now, all this money that was all flowing through the SBA program. But banks were not now going hiring 20 people to go and now handle these PPP loans.
So the teams that were handling their traditional new business startup loans now had to pretty much turn on a dime and start working on these PPP loans. So that slowed up some aspects of the program for people that were still going through the process of pursuing new. But yes, I mean they put money into the program.
There's going to be more money coming into the program, there's a lot of exciting legislation that's out on the hill right now that certain representatives want the government to look at. As we start to look at not only supporting the existing small businesses of the United States but how do we continue to build that entrepreneurial new business. Raising the guarantee level for the banks, making the application process easier.
Pete: But let's take a step here, right? So what were some of the benefits with the SBA as they rolled the money out? So I think I heard that they were for people at SBA loans; they basically paid six months for them. Is that correct?
Eric: Yes. So when the cares act came out, everyone was talking about the PPP side. But was really great is what they wanted to do is impact these new loans. So what they had said is every loan that is closed and funded by September 27th of this year, that the SBA would pay the first six months of principal and interest on that loan.
Pete: That's incredible.
Eric: That way not deferred, where there's still tax implications, they would literally make the payments on those loans. And that was all SBA loans. So you go out and get a three million dollar loan that has a debt service up to here, that's six months' worth of payments. So that just shows the vision of them realizing how much new business impacts our economy.
Pete: Yes, that was forward-thinking. I knew that they had done it for people that were existing, and then I had also heard the new ones, which was pretty amazing. As we look forward, do you see that also being continued? That they offer that again?
Eric: I mention the certain things that I know that are on the hill right now and probably the two biggest impacts that I would see for future business, and really injecting the banks with more motivation is probably extending that date, have not heard one way or another. But we know that the words are out there, to ask government to do so.
And the biggest thing is to ask government to increase the guarantee percentage that they provide for the banks. So for everyone, just real quick, the way an SBA loan works is just like an FHA loan for a home; the bank is going to give the loan to the borrower. And the reason they feel comfortable is that the government is guaranteeing a certain percentage of that loan to the bank.
That way, if it ever goes south, the risk was mitigated. It's the same thing in the SBA environment; the government guarantees a percentage of that loan to the bank that's giving it to that entrepreneur. The last words that I heard were that there were talks about increasing that guarantee up to as much as 90% for the banks.
Pete: Wow, what is it now?
Eric: You're in the 70 to 80 percent range.
Pete: Okay. So that's pretty substantial.
Eric: Yes. So you see a 90% guarantee, not only do you see banks that are now going to be more apt to put money out there. The number of banks participating is going to go through the roof. And when you're a borrower, the more banks involved, the better situations for you.
Pete: Yes, that's awesome. All right, so a lot of money went through PPP, a lot went through the SBA. But I hear from people like that are in the process of trying to get an SBA loan, it's just taking more time, it's delayed. So tell me a little bit about kind of the process in terms of time to get an SBA loan done.
Eric: Yes. I've always made the joke speed, and SBA loans will never collide. We are talking about a banking world, combined with a government world. So I think what we've seen most in the COVID environment is almost what I was mentioning before, is just overall volume.
When you add the PPP loans and people that are still pursuing new loans, and these banks didn't exactly go out and hire 50, 20 more people. You just have underwriters that are dedicated now to supporting their existing small business and then having to pivot back to working on new loans.
So you've seen a little bit of a speed bump there, I would call. It's not a slowdown, it's not a complete stop. It's just that everyone's moving fast, and then all of a sudden, well, now it's gotten to underwriting. So it's maybe ended a few weeks, and then once they get past that, they go back to the speed path again.
Pete: Got it, got it okay, so perfect. Now there are different types of SBA loans, right? So there's the regular ones, and then there's these SBA express loans. Can you tell me a little bit about the difference between the two? I think it's important.
Eric: It's important, and it's a very passionate area for me it's very confusing, and a lot of times it's just of, for lack of better words, misinformation out there. There is an SBA 7A loan, and that 7A loan is almost all-encompassing. That is a traditional 7A loan, the whatever you want to call it, the under 150, the fast track, the load document, all these different things, they're all 7A loans.
So there's always been a confusion; what about the microloan or the fast track loan? They're all 7A. There's the 7A loan, and there's a 504 loan, a 504 loan is more dedicated when there's a purchase of real estate, but the 7A is all-encompassing. Now what's different is in certain loan sizes.
So in the loan size under a hundred and fifty thousand dollars. And that's the one Pete that can be called fast track, load dock, express loan whatever it means, still 7A, but that's the one that's had the most names given to it.
It really just eliminates some of the requirements that the traditional 7A loan has. Whether it's in what type of packaging, what type of documentation? And really what type of collateral.
So in the under 150 realm, what you're finding is that most banks that play in that loan signs will not require personal collateral, and there's usually less documentation and a faster process to get that loan done. And that's really where you see the biggest difference in the under 150,000 loan size, and then everything above.
Pete: So the personal backing of it, or a personal guarantee, that's not required if it's under 150,000 for some financial institutions?
Eric: Correct.
Pete: Good. And then the structure, sometimes people say it's a fair amount of capital fees to get into an SBA loan. So can you block that out? I know there's like three or four core fees associated with doing SBA loan; tell me a little bit about that.
Eric: Yes. I mean, really, what you're going to look for is you're never really going to find a hundred percent financing in the SBA environment. I would say, on average, the bank is going to look for the borrower, depending on the loan size, to put in to the project. Anywhere between 10 to 25, 30% of whatever the total project costs are.
So if I'm buying a business opportunity that's 300,000, the bank might say we want to see 75,000 come from Eric, and we're going to give him a loan for the remaining 225,000. Now what's nice about that is I just don't look at that as a fee. A fee is somebody I would be saying I'm paying the bank to get this loan done. That is actually money I'm putting into the business.
So if I pay a franchise fee. If I pay an attorney if I travel somewhere to look at a site. If I'm working with a real estate team, anything that I put up my own money into that business goes towards that, what's often referred to as equity injection. So you have that is how the loan is structured, you're typically going to look at an interest rate of anywhere between five and a half to six percent in this environment.
The SBA sets a cap on SBA loans at prime plus 2.75 as the ceiling for the interest rate. And prime right now is the lowest it's been in the history of our country. So you're at three and a quarter, so you're looking at a maximum interest rate of six percent. Outside of that, there's really not a lot of what I would call fees.
I mean there's typical closing fees with the banks and certain things like that, but a lot of that can be built into the loan size. There's what's called the SBA guarantee fee, which is all again built into it. But for a borrower, you're really just thinking about what do I have to put in for my end and what is the bank going to finance.
Pete: Yes. And why would somebody go to Benetrends versus somebody else to do an SBA loan? What separates you guys from others as it pertains to getting SBA loans done? Because it's one thing to apply for one, it's another to get approved and funded.
Eric: Yes. I guess the best way of saying it and very similar to the industry that near and dear is we're almost like the matchmaker for the banks. One thing that you'll learn is some banks like chocolate and some banks like vanilla, and you can take the greatest vanilla deal in the world to a bank that likes chocolate, and they're going to turn down that loan.
And it's going to have nothing to do with how good the business is, whether they think it can work in this environment, in a COVID environment. If they think you're a good fit, it just did not fit their appetite. The problem is the bank doesn't say that; they just turn down the loan.
And then we see so many borrowers that think, oh well, I went to three banks they turned me down, this must not be a good business opportunity. And really, all it came down to is you went to the wrong bank. So does this bank like fitness? Does this bank like service? Does this bank like brick and mortar? This one has a higher collateral requirement, and the client doesn't have that, so let's find somewhere else.
So really, what our job is on the Benetrends side when it comes to SBA financing is matching the buyer and the business to the bank that we know has an appetite for their opportunity. And in the SBA environment, different than buying a home, you go to three places that turn you down for a mortgage, you say all right, maybe it's not time for me to buy a house.
In my career here, I have seen so many situations where it might be the eighth, ninth or tenth bank that you put that loan package in front of that approves that loan. So it really is more about expanding the resources and getting your loan in front of the people that want to see that opportunity.
Pete: So if I understand it correctly, the benefit you guys have is that one you understand many of these franchise business models. Number two, for lack of better terms, the financial institutions that like those types of businesses, and you can kind of connect the two of them.
And because you're so large and you work with so many people, and you focus a lot on franchising, that gives you guys a competitive advantage. Is that fair to say?
Eric: Yes. I mean a competitive advantage one over the other companies, but competitive advantage for lack of better words over the individual that just wants to go on their own. I've always made the joke, in the SBA world, if you give the keys to the bus to the candidate, they're going to crash the bus.
Pete: So when you say a lot of times, people say Pete, I want to go to my local bank, I want to give them a shot at the SBA loan. And what I tell them is a lot of times they don't understand the business model, and number two, they don't necessarily know the institutions that are buying the paper for that type of business.
Eric: Absolutely.
Pete: Yes, that's cool. All right, so SBA it's out there, it's working, a lot of money flowing through it. Are there other ways that people can be leveraging capital today to fund their businesses?
Eric: Yes. I mean, listen, even in my last decade of being in this space, and even within the last six months, you just constantly learn and see all different ways that people access capital. And it's always important before I even talk about those is, you always need to understand what all your options are.
That doesn't mean you have to use them. But if all you have is a hammer, everything starts to look like a nail. You've got to look at all the different tools that you have in your tool belt, doesn't mean you have to use them. So outside of SBA, I mean, obviously, you have people that will utilize cash combined with an SBA loan or just purchase a business with cash.
One thing that we have seen consistently in this market is home prices have still held strong if anything have gone up. So different than 08, 9, and 10 when we were going through a crisis, home prices were going down, and home equity lines of credit weren't a thing to access. I am seeing a number of people just access that and combining that with different type of lending options.
Using a stock portfolio in the similar vehicle of a home equity line of credit, you can take a line of credit against a stock portfolio. A lot of people don't know that exists out there. But the most interesting aspect is when I still see people that take advantage of all the resources that get tied back to our retirement account.
So part of the cares act Pete, also was not just given to SBA and PPP loans. They made some changes as it relates to retirement accounts through the cares act. So for most people, they'd always known if I pull money out of my retirement account before the age of 59 and a half, I pay a 10% penalty. And I'm going to pay income tax on that money in the year that I pull out that money.
Or if I'm working for an employer and I want to take a loan against my company's retirement account, I can take a loan for up to 50% of what I have in there, at a maximum of fifty thousand dollars. The cares act made changes to both of those programs. So number one, given that you have a COVID hardship and there's certain things that the IRS has laid out that identifies for that.
If you want to pull money out of your retirement account IRA, 401k, whatever it may be, they have waived the 10% penalty. Not only that, they have decided on those distributions to spread the tax burden over a three-year period. So people have, listen it's not always the ideal situation versus the rollover program, which I'll mention as well.
But if somebody doesn't have access to that roll over, they're still employed; that is one thing that people should consider as well on the loan portion. They've removed the 50% limit and have raised that to being up to a hundred thousand dollars.
So those are things that people need to utilize, but a program that Benetrends pioneered that our founder Leo Fischer back in the early 80s that we've been doing for three decades is something called the rollovers as business startups.
And outside of those two previous scenarios, of either taking a loan or a distribution, this process has been in place that allows somebody to access retirement funds with no tax and no penalty, as long as it's being used through the proper structure and retirement plan design set up to purchase a business.
Pete: Do you help people set it up the right way? I know it's bad. If you don't set it up the right way, it can be very painful. But you help people kind of set up the structure so that they're compliant?
Eric: Yes. I always am amazed when people say, oh, I found somebody that could do this or that, and I say listen when you're talking about corporate structuring, EIN creation, plan design, and anything that has those lovely three letters the IRS involved. I want to make sure things are in place.
So yes, Benetrends has set up the structure of the proper corporation retirement plan design, money flow, everything that needs to be set up to make sure that clients can essentially fund their business or business opportunity with retirement funds and no taxing penalty. And we do that entire structure from start to finish, and that is really what Benetrends was built on.
And that is a transaction we've done over 15,000 times. We have retirement plan design specialists, Erisa attorneys, actuaries, people way smarter than me that handle those aspects.
But yes, I mean it's an amazing structure that allows somebody to essentially say in corporate world, I was investing in somebody else's business through my retirement account. This structure allows that same structure, but instead of investing somebody else's, you're investing in your own.
Pete: Wow, that's pretty cool, right? So you become actually an employee of your retirement account?
Eric: Yes, exactly.
Pete: It's an absolutely amazing program and congratulations on you guys founding it or starting it. So that's great. So many different ways if somebody decides that they want to invest in a business, they've got the SBA, they've got other alternatives to fund the business. Where do you see the funding side of the business going? So we're still in this COVID-19, it's a crazy world, lots of change. Where do you see it going from here?
Eric: You know, I think we're going on the funding side, and what I believe that the U.S. economy is going to see, and what I think the government's going to do to support it. I know it sounds odd to say here in august of 2020 and everything that's going on; I'm excited about where I see the lending world going because the American spirit is going to continue to push on, and the government's going to support that.
And part of the way that they're going to support that is injecting faith in banks to support the small business owner and the entrepreneur. And I know it's not perfect right now. I mean banks, just like everybody else, they have their days where they wake up, and they say, oh, we're a little spooked on what we saw in the news today, should we change our direction here?
Other banks look at it and say, wow, there's a lot of opportunity that some people are probably walking away from that I think if we pick that lane in a couple of years from now, we're going to be sitting pretty. So between that, between what I think we're going to see as far as more programs that are created to even break down even some of the further walls that get in the way of that small business owner.
The rollover program, I still am very confident in lending today, and I'm very confident what lending looks like going into 2021 and even beyond where I think today. Between the rollover program, portfolio loans, and what I think that the SBA program is essentially going to adapt into. I think SBA has been incredibly strong in the last three, four years. I just think like anything else, just like the stock market.
Sometimes you go through a short little period where we have a little market correctness for lack of better words. It sort of pulls itself back, and people realize, okay, now let's really pick the lanes I want to go in, and then once people get in the right spots, it's full steam ahead. I think right now, people are picking their lanes, and then as we transition into the fall and the end of 2020 and moving to 2021, everyone's going to be properly positioned to go full steam ahead.
Pete: So this recession that we have now, versus the one in 2008, the difference in terms of funding businesses is there's so much more strength and capital into the financial institutions, is that fair to say?
Eric: Yes. I mean, let's face it, 2008 and 9 was the collapse of the banking world. This is not the collapse of the banking world; we have a pandemic that's forcing us to adjust our lives. The banks are still doing business; the banks are still strong. They have the money; people have the opportunity.
Home prices are where they need to be. I know a lot of people were relate where we were of some unemployment in certain aspects, but it is a very different opportunity as far as availability of capital.
Pete: Yes. So strength of the financial institutions, the housing market hasn't collapsed like it did in the last recession from that standpoint, so we got that going for us. I mean, we did a podcast the other day in regards to are we really in a recession?
I mean, if you go to try buy a car, the used car inventory is at a 30-year low; good luck. The values of used cars are actually going up, if you can believe it or not, I was just finding out from my ford dealer. So it's just absolutely amazing out there.
Eric: Yes. If you look at the banking industry, it was hey; we don't have a job for you now; you're laid off. Now it's hey, we just have to work remote. I know it's been a transition, but this is not 2008 and 2009. It's not perfect by any stretch of the imagination. But I think labeling it a recession is inaccurate.
I think it's a change, it's a new; I made a comment to my sales team the other day, I called it the normal, the new normal. And I just think that's what we're adapting to. I just think it's a new normal, for lack of better words.
Pete: Yes, it's a crazy world. Well, congratulations on all your success personally, as well as with Benetrends. It's absolutely amazing to watch what you guys do and help all these people that want to kind of escape the corporate world, to hire themselves, to live life on their terms through business ownership.
And it sounds like there's so many opportunities to capitalize a business in a way it's smart, and they've got you to help them do that.
Eric: Listen, it's the best part of our job; I mean is being able to speak to people that are going through all different transitions in life. And just hear their story, tell them what their options are.
Probably 70 percent of the time, we tell somebody to pick an option that isn't even a product that we really even focus on, but it's just fun to see that person make that transition, take more control, and just make sure people understand what their options are, and if it's something we can put them on the right path, it's a really rewarding process for us.
So I appreciate all of your support over the years, and it really is a great spot to be in, so thank you for having me today.
Pete: Well, you're welcome. So thanks for coming, and have a great week.
Eric: Thank you, do the same.
Pete: All right, take care.
