photo credit: Wonderlane

As business owners develop their small business loan plans for future financing and refinancing throughout the United States, there is an increasing awareness that there have been significant business finance changes that cannot be ignored. Some of these measures are likely to end up being permanent, and even the temporary commercial mortgage loan and working capital loan changes are expected to be in place for an extended time due to the severity of the current financial climate.

A reduction in commercial lenders as well as stricter standards for acquiring commercial loans and commercial mortgages has been the net result from business finance changes. Unfortunately there has also been no shortage of misinformation about the availability of commercial funding.

A significant reduction in business lending activity overall is perhaps the most dramatic change. This has been due to several events occurring almost simultaneously. Several major commercial lenders have gone out of business altogether. Many banks have stopped commercial finance lending while continuing consumer lending. Numerous business lenders have enacted stricter standards for the commercial financing transactions they are still willing to consider.

It remains to be seen how many changes will be permanent or temporary. But from a practical perspective, commercial borrowers are left with no choice but to adapt to the changing business finance environment. Business owners must be prepared to operate within a more complicated climate for commercial mortgage loans and small business loans regardless of how long the changes might be kept in place.

What should borrowers do about this? A primary option that business owners should explore involves looking beyond their local market area for help with commercial loans. To accomplish this, it should be helpful to contact a commercial financing expert operating throughout the United States.

In addition to fewer business lenders to choose from, there are two other significant changes which must be anticipated by business owners before seeking new commercial loans. First, more collateral for virtually all business finance funding is being demanded by many commercial lenders. Second, most lenders have cancelled or are about to eliminate unsecured lines of credit (usually called working capital loans) for many businesses.

One effective commercial financing strategy for overcoming the combined obstacles of more collateral, fewer lenders and reduced unsecured credit lines is to consider business cash advance programs based on future credit card processing transactions. This is proving to be one of the few sources of business funding that has not been adversely impacted by recent events. To learn more, it will be advisable to discuss the potential with a business finance expert who can provide advice about business cash advances as well as other small business financing solutions.

It is increasingly obvious that many banks will continue to modify their business lending programs in response to changing conditions. This means that another key change issue for working capital financing and commercial mortgages is the likelihood that more changes will be forthcoming in the near future.

To adequately prepare for future commercial finance changes that might (or might not) occur is a daunting task for a business owner. A commercial financing expert familiar with Plan B contingency financing for small business loans will prove to be a valuable resource for any borrower wanting to seriously deal with both current and future changes impacting the financial health of their business. By having a candid conversation with a commercial loan expert, business owners should be more capable of implementing an appropriate strategy for the vast changes which have recently occurred or are about to become effective for most business financing and working capital finance funding.

Learn about avoiding small business finance funding mistakes – Stephen Bush is a commercial financing expert => AEX Commercial Mortgage Loans and Business Cash Advances – The Working Capital Journal

photo credit: irrezolu

In these uncertain economic times, emerging franchise companies are finding it difficult to fund their franchise expansion strategies. Traditionally, franchise companies fund their startup and expansion in one of two ways:

1. By the Shoe String. Start up and expansion funds come from friends, family, home equity, and credit cards (although many of these traditional funding sources are hard to obtain these days). If all the stars align correctly, this initial capitalization bridges the gap until internally generated cash flow is able to fund future growth.

2. Institutional Capital. There are two sources of institutional capital – (1) loans and (2) venture or angel funding. Loans generally originate with banks. Loans often require significant collateral and personal guarantees. Institutional investors traditionally do not invest in franchise companies because they do not “get franchising”. Although in recent years, this trend is changing as some institutional investors are funding more established franchise companies’ expansion strategies. Angel investors do make investments in franchise companies, but often require a significant amount of control, which some franchise entrepreneurs find objectionable.

A franchise company has two assets of intrinsic value: (1) intellectual property which constitutes the “franchise system;” and (2) the geographical franchise territory. Many franchisors do not realize that the opportunity to fund their start up and expansion costs can be obtained without borrowing or selling equity by leveraging these assets.

Structural Funding

Structural funding is a financing mechanism that creates capital through sale of a franchise company’s intellectual property and geographic territory. This can be compared to a sale/leaseback of a company’s real estate to generate cash. Combine the sale of these assets with the implementation of an organizational structure that shifts operational costs and support responsibilities to a strategic partner, and you have an innovative strategy which can be used to completely fund a franchise company’s start up and growth strategy.

There is no right or wrong funding solution. Each has its own advantages and disadvantages. However, Structural Funding is not reviewed by loan or investor committees. It is more akin to simply finding a good partner.

How an Area Representative Structure Works

There are five elements in successfully structuring an Area Representative Franchise Growth Strategy:

1. Value Creation. The sale of intellectual property and geographical territory is the mechanism that generates revenue in the form of Initial Area Representative (AR) Franchise Fees. The initial fees can range from $50,000 to $300,000+ per territory, depending on the complexity of the franchise system and the size of the geographical territory being awarded. These fees are deployed by the franchiser to market the AR strategy, underwrite the training and support of AR, and to offset other operational costs in managing the franchise company and the Area Representative Program.

2. Royalty Sharing. The sharing of royalties creates a business arrangement in which much of the operational and support responsibilities are transferred to the AR Strategic Partner. The royalty sharing percentage can range from 40% to 75%, depending on the scope of support the AR is responsible for providing to franchisees. Some agreements delegate all training, opening, and ongoing support to the AR, and in other situations the franchiser retains training and opening responsibilities, and only field support is the responsibility of the AR.

3. The Right Franchise Development Schedule. Frequently, franchisers are too aggressive in establishing unit franchise development schedules. If a development schedule is too aggressive, an AR may award franchises to marginally qualified franchise candidates, simply to meet the development schedule.

4. Recruiting Mr. Right. In my experience, an adequately capitalized sales-oriented individual is a better AR candidate than a well capitalized resumé rich senior corporate executive. Talented operational individuals can be recruited more easily than a franchisee centric motivator and sales oriented executive.

5. The Right Support Infrastructure. Most franchisors who implement an Area Representative Program use the same support system and personnel that they use to support their franchisee network. This is a huge mistake. Franchisees and AR are two distinct constituencies, and need the appropriate support system that is focused on their needs.

A properly executed Area Representative Program will lead to brand dominance and over the long term crush competition which leads to profitable franchisees. These profitable franchisees generally provide a higher quality customer service, which creates customers, leading to even more brand dominance and more profits, which attracts more franchisees and the cycle continues. All of this is made possible by adopting the Structural Funding Strategy and properly executing the Area Representative Franchise Growth Strategy.