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Business Tips From the Editor - January 2024

BUSINESS TIPS FROM THE EDITOR  January 2024

Richard T. Hendee, Editor
The Silver Fox Advisor

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Last month’s Business Tip outlined the reason for doing a 2024 Business Plan. This month I want to discuss the other key element of an annual business plan, and that is an annual budget.

 Annual budgets are a good way for a business to stay on track financially. Like creating a business plan, if you have never done an annual budget before, it can be a challenging task, but once your budget template has been developed, each year gets easier to complete. The budget process should start with an annual forecast and then be broken down on a quarterly or even a monthly basis.

 A budget should not be something that is done at the beginning of the year and then not looked at until the end of the year. The budget needs to be monitored and measured vs. the actual results on a quarterly or ideally a monthly basis. As an example, if advertising was budgeted at $20,000 for the year and after the first quarter the actual advertising expense was $15,000 that leaves only $5,000 for the rest of the year. That may be O.K. if that is your business cycle, but most businesses typically advertise the entire year. In this case, to stay on track with your budget you may need to look at some of the other expense line items where you can move some funds into advertising. Or, maybe the additional advertising dollars spent in the first quarter generated additional unplanned revenues that more than offset the additional advertising expense.

 Another point I would like to make regarding the budget process: The budget almost never will match up exactly to what the actual results will be. If you try and create a budget that does that, you will be beyond frustrated. The budget, like the business plan, is a road map to guide your business during the year. Think about the last big trip you took. You planned out your route, but as you actually did the traveling, you ran into a detour that took you off your planned course. You probably pulled over and determined a side course that you could take to get you back on track. That is exactly the process you should follow when monitoring your business plan and budget throughout the year.

 One final thought. Without a formal business plan and budget, you and your business will likely not be as successful as you would like or as you and it can be. Getting up in the morning and going into your business without a plan and budget, you will probably find yourself putting our fires and chasing shiny objects all year long and ending up at the same place you did when the year started, or just maybe behind where the year started.

 Is this the year that you do something different and create that business plan and budget? If you need help or assistance, we encourage you to visit our Web-site at www.silverfox.org and learn more about the Silver Fox Advisors, and how they can assist you with your business needs, as well as discover more about our great programs and community outreach endeavors. 

Franchise Lending Using An SBA 7A Loan Solution

FRANCHISE LENDING USING AN SBA 7A LOAN SOLUTION

by

Gary Henderson, a Silver Fox Advisor

Franchising can offer a potential business owner a system that typically has a proven history of success in a particular industry. A franchise system is a defined way of doing business for a particular franchise concept. If the system is followed by the franchisee (franchise business owner), the franchisee should expect similar results that the other franchise owners have experienced, subject to local market conditions and location.

Franchising may help remove some of the “trial and error” learning that a business owner will experience in starting and owning a business. Key areas of a business that the franchisor provides support in: (1) site selection (2) equipment/inventory purchasing (3) selection/training of staff           (4) marketing (5) owner management oversight and (6) record keeping.

An important consideration for the potential franchisee is how to finance the costs of opening the franchise. For some franchises, the amount required to start the franchise may be small enough that the owner can handle the start-up costs out of personal resources. These resources might include cash, savings, retirement funds, stock or available home equity.

For the entrepreneur in need of financing to start-up a franchise, an SBA guaranteed loan could be the optimal solution.  An SBA 7a loan is a loan originated through a bank, a non-bank lender or credit union that participates in the U.S. Small Business Administration’s 7a loan program.

The SBA 7a loan can finance most of the needs that a franchisee will have in starting their franchise: (1) franchise fees, (2) leasehold improvements, (3) leasehold improvements soft costs, (4) purchase of equipment, furniture, fixtures or inventory, and (5) working capital.  The SBA 7a loan can also finance the purchase of an existing building or the construction of a new building, if the project requires the business to own the real estate.

In exchange for an SBA guaranty of 75% and a fee to the SBA, the lender may be willing to grant a loan that based on a lower required equity injection and a longer amortization (up to 10 years). These improved loan terms allows the franchise owner to preserve working capital for the daily operations of the business and have a more reasonable monthly debt service payment. 

As of October 1, 2023, the SBA has reduced the SBA Guaranty Fee to “0” for loans up to $1 million and has reduced the guaranty fees on loans up to $2,000,000. 

The improved loan terms that the SBA loan can provide are typically not available elsewhere in the market place.  Conventional bank loan terms are usually based on shorter amortizations and require a much higher equity injection (especially for a start-up business) and will probably require collateral to fully secure the loan.

A short loan amortization will result in a higher monthly loan payment and restrict the amount of cash flow available for the daily operations of the business. A large equity injection can reduce the loan amount and the monthly loan payment. However, a larger equity injection reduces the amount of back-up liquidity the business owner will have available. The franchise owner should consider the need to retain some back-up liquidity for unanticipated personal needs or to support the cash flow needs of the business.

When the franchisee experiences a business “bump in the road” in the life of their business, they will realize the value of preserving their business cash flow due to a lower loan payment (thru a longer amortization) and the potential of having back-up liquidity available to them (thru a lower equity injection).

The SBA 7a Guaranteed Loan is an excellent financing solution for franchisees, but is also great for small business owners seeking to purchase a building, expand an existing business, purchase an existing business or for a full or partial buyout of a business partner.