Franchise QB

Episode 43: Kelly Krueger- Senior Consultant, Benetrends Financial

• Mike Halpern • Season 1 • Episode 43

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Kelly Krueger, Senior Consultant at Benetrends Financial, joins the Franchise QB Podcast to discuss franchise funding options. 

Takeaways

Working with a company like Benetrends Financial provides access to a network of banks proficient in franchising, ensuring a smoother funding process.

The Rollover for Business Startup (ROBS) allows individuals to use their pre-tax retirement funds to invest in their own business without incurring taxes and penalties.

SBA loans are a popular funding option for franchisees, and it's important to have a solid credit score and liquidity to qualify.

Educating oneself about funding options early in the franchise ownership process helps determine realistic investment capacity and saves time.

Using retirement funds for business investment can be a viable option, especially when combined with other funding sources.

The economic climate has led to a shift in funding trends, with more people opting for ROBS and looking for funding options with the smallest cost of capital.

Chapters

00:00 Introduction
02:28 Exploring Benetrends Financial and Their Network of Banks
07:51 Understanding the Rollover for Business Startup (ROBS)
10:39 SBA Loans: A Popular Funding Option for Franchisees
17:33 The Importance of Early Education on Funding Options
21:00 Using Retirement Funds for Business Investment
25:42 Combining Funding Options for Maximum Borrowing Capacity
27:30 Conclusion and Call to Action

www.benetrends.com 

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Contact me and my team with any questions along the way. www.calendly.com/franchiseguy
Mike Halpern, CAFC
mike@franchiseqb.com

This is the Franchise QB Podcast, where we empower entrepreneurs to win big in franchising. We huddle up weekly to educate our audience about the most successful small business model ever created. Franchise it! Welcome to the Franchise QB podcast. I'm your host, Mike Halpern, a 20-year industry veteran and entrepreneur. My mission is for listeners to achieve their American dreams of creating wealth and independence through franchise ownership. Every week we speak with franchisees, franchisors or vendors that support the industry. Thank you for joining us and let's get started. Joining us in the huddle today is Kelly Krueger, Senior Consultant at Benetrends Financial. Welcome to the show, Kelly. Hey, thank you for having me, Mike. Yeah, it's great to see you again. So let's talk a little bit about your background before we get into Benetrends. You started your career in pharmaceutical sales and then pivoted at some point to financial services with Prudential. And then you and I met when you were working with Tenant Financial. And a few years ago, you joined Benetrends. So tell us a little bit about how you got involved in the franchise funding side. Yeah, I love that question. You know, like most of the clients that I work with, honestly, I was just very tired of corporate America. I couldn't stand it. I couldn't stand it one more day. I wanted a better quality of life. And I was tired of getting downsized. And again, truthfully, I talked to mostly two types of people all day and they fit that criteria. And of course, we work with people that just want to build an empire. higher, they want to have their own business. But that was what motivated me to really just change directions altogether and go into a different industry. So once I got those financial licenses, I worked for Prudential for about eight months selling insurance and annuities. And that just wasn't for me, you know, and the reason it wasn't for me, honestly, is I just didn't believe in what I was doing. It was after the market crash. I didn't want to put my put people's money and investments that I wouldn't put my own money in. So I ended up getting out of that and it was a franchise consultant, actually a neighbor of mine that led me to this industry. And he's like, I think this is going to be a great fit for you. And he was right. So 13 years later, sounds like a pretty cool story. can share with your candidates because you kind of went through that whole transition out of corporate America yourself. relate. I'm so empathetic. Yeah. So let's talk about Benetrenz. What is Benetrenz Financial? Can you share some brief history and kind of the overview of the funding options that you guys offer candidates? Sure. So we started in the industry back in 1983. So we've been doing this for over four decades, funding for small businesses. And we actually, we pioneered the ROBS, R -O -B -S, the Rollover for Business Startup, which we'll talk a little bit more about. But we actually pioneered that and the founder of Benetrends, name's Len Fisher, he's an ERISA attorney. So he's the one that created the guidelines for it, had the IRS kind of edit and review it. And then we introduced that to the franchise industry. So that's what Benetrends is best known for. And then through the years, we've evolved to be a one-stop resource for our clients to offer SBA loans and fleet leasing, equipment leasing, other types of financing for our clients. But we've been around a while for sure. Yeah, that's great. So this leads me to a question that I know you get all the time and I get it when I'm working with candidates evaluating business ownership. Why would a candidate go to Benetrends seeking funding to start up or acquire their business as opposed to going directly to their local bank? Yeah, I think there's a few reasons for that, honestly. The biggest thing I tell people, Mike, is it's not necessarily that you can't work with your local bank. But if you're going to work with your local bank, there's a couple things, couple questions you wanna ask. You wanna make sure that they're very proficient with doing SBA loans because not all banks do them and they might not do a lot of them. And if you feel comfortable with that, then really the most important thing is that they're proficient in franchising because that's a whole different animal, right? When you're talking about franchise disclosure documents and... Item 19s, you need a bank that's used to that because where I've seen people derail is they get two to three months into working with a local bank because they've been told that they can do it and then they can't do it and they've wasted all that time. So that is the benefit of working with a company like Benetrends. We have a portfolio of gosh, probably a hundred banks at this point and all of them are proficient in franchising. So they understand all of that. And we've... have a lot of different services and packages that we offer. So if somebody, for example, wants to hire us to write the business plan, to do the projections, they can do that. We could take a lot of work off their plate and we're going to go to our network and pair them with the bank that's going to provide the best rates and terms and be the best fit for their project. And we can easily pivot to any of our banks if we need to pivot. I think no, it really makes a ton of sense to me coming from the consulting side, because when I work with a client. say the same thing. You can go approach any franchise you want, but if you want to do it with an expert in the field that has their finger on the pulse and has relationships with the brands and knows the franchise owners that can really guide you to something that makes sense for you, working with the consultants, great. Not for everybody, but it's a really good approach to save time, which you know is our most valuable asset. So I totally get it. And I think you and I have that same conversation with our candidates quite a bit. So let's take a little bit of a step back and talk about the macro economic climate. How has that affected trends with funding, especially in the franchise space? It hasn't impacted things in the way I expected. And what I mean by that is when rates over the last two and a half years kind of skyrocketed, I really thought it was going to slow down our industry dramatically. thought it was people were going to pump the brakes, but they haven't. If people are still pursuing business ownership, so I haven't seen anything slow, but I've seen a shift in the way they're funding their businesses. whereas, know, three, four years ago, you could get a HELOC at two and a half, 3%. They were giving away money, right? And at that point, it made sense to borrow, but today rates are maybe, you know, upwards of 11 and a quarter for an SBA loan as of today. So a lot of people are shifting away from borrowing money and leveraging debt if they don't have to, and they're utilizing the ROBS more, the Rollover for Business Startup, using their own retirement funds to invest in the business so they don't have monthly payments and they're not wasting money on interest. So they're looking for the funding option that gives them the smallest cost of capital. So that's really the shift that I've seen more ROBS in either Really not fewer loans necessarily, but lower value, lower dollar. Yeah. So why don't we flip -flop? So let's start with ROBS and then we'll get to SBA next. So the ROBS, you mentioned, is an acronym. For those that are new to the acronym, it's Rollover for Business Startup. Can you explain what it is and how these pre -tax retirement funds can be used to invest in your business without the taxes and the penalties? How does it... actually work behind the scenes. Yeah, and I love this product. I absolutely love this product. And we've going to the Rainmaker Plane of Benetrons, which sounds better than Rob's, right? But the gist of Rob's, and then I'll fill in the gap, but the gist of it is that it gives you the ability to take your peri -tax retirement funds from like a 401k or an IRA and instead of investing them in someone else's company, which is what we do, right? When we buy stock in Amazon or Coca -Cola, you can take those funds and you can invest them in your own business. And you can do that without taking a distribution and paying taxes and penalties on the money. So it's a really unique way to fund a business. like I said, it's not new. It's been around for four plus decades and it's literally done thousands of times a year in the franchise industry. So it gives people access to money that they wouldn't otherwise have access to without paying taxes and penalties. And it serves a lot of purposes. So sometimes people will fund their entire business with Rob's and go in debt free. Plenty of people do it in combination with an SBA loan or a HELOC or just cash. you really it gives you some flexibility. But what I always want people to understand, Mike, about Rob's is that it's really double sided. So on the front end, it's a funding mechanism. You're using pre -tax money to invest in your business. So you're getting thousands of dollars of your own money back. that normally you just pay the government tax to invest in your business day one. But on the back end, it's really meant to be a wealth, like a retirement wealth building strategy, because you're gonna have a retirement plan in place for your business now. You're gonna be a W2 employee of your business and you're gonna use it. You're gonna contribute back to that retirement plan and continue to build it over time. And then you've got the... the company stock held within it as well. So if the business performs as well as they expect, truthfully, they should get a better ROI on their investment within their business within a ROBS than they would if they just left it in the market. Yeah, and I think this product requires a certain degree of education to have someone wrap their head around the mechanics of how it works. And once they do, a lot of people realize if they have those resources that that's a really good approach. That's a really interesting. whether it's fully funded or partially funded, it tends to be in the mix quite a bit. So let's shift gears a little bit and then talk about the SBA. So SBA, for those that are listening that don't know the acronym, it's the Small Business Administration. They provide a guarantee to a bank as long as the loan falls in certain lending guidelines. So can you explain how that works? Sure, so like you said, SBA is just a government agency, right? They're not the ones making the loan. The banks are the ones that are making the loan and they will not fund 100 % of the investment. They're always gonna be looking for some skin in the game from the borrower as well. it's gonna be a minimum of 10%. It's usually not more than 20. With a startup, you can expect upwards of 20%, but it'll be somewhere between 10 to 20%. and the money that comes out of pocket, they're going to put that towards the franchise fee. So it's not in addition to, they're going to put that towards the franchise fee. And the bank doesn't want to take your last dollar. They want to see the chance of post -closing liquidity too. So, you know, a rainy day fund and that may be upwards of another 10 % of the total investment. Maybe not that much. It really just depends on how, you know, what their monthly expenditures look like. But I think it's safe to assume that you're going to need 20 to 30 % liquidity for the investment that you're looking at. Yeah. And then in terms of the credit threshold, I know that changes from time to time. What is it currently that makes banks and SBA comfortable with making the loan? I know for us, for our portfolio of banks, we always really like to see everybody at 6 .85 or better. Okay. And when they're married, even if the spouse, you know, if both spouses are not going to be part of that loan. It still matters. We still want to be everybody, see everybody at 685 or better. The business, like with everything in the item seven, working capital, FF &E, the whole caboodle is about a half a million. Using SBA, 20%. We're putting in 100 ,000. We have another 50 in the rainy day fund. That's the 10%. So that 150K liquidity in that example will get you in the business provided that everything else checks out. You got it. And it might, and you might not even need quite the 150. That's, I'd say that's worst case scenario. Okay. Very cool. So let's talk about the rates. I know that that's been pretty consistent over the years, but how do the SBA rates work and what can we expect over the next year, year and a half? So with, with SBA, they always start with prime and prime right now is at eight and a half percent. And then they add to that and they can add up to another 2 .75. So the max rate that they can charge in a anybody today is 11 and a quarter. And with a startup, I think it's safe to expect that or real close to that. And they're adjustable rate loans that move with prime. So the good news is we are expecting rates to start coming down later this year and over next year. hoping that they cut, we're hearing that they're gonna reduce them once this year, probably, you know, here end of the summer and upwards of maybe four reductions next year. Now, do they do it? We hope so. And do we know how much they're going to do it? We don't. But the good news is that with adjustable rate loans, normally I wouldn't call that good news to have an adjustable rate loan. But in this case, we do know they should start coming down. So the borrower does not have to monkey around with refinancing. Their rate will automatically readjust with it the first of the following quarter. Okay, very cool. Thank you. So I know the answer is it depends, but if a client is working with you diligently in your SBA team, what is the typical timeframe for them to actually secure the funding via SBA? Plan on a 60 to 90 day process. And occasionally if it's a real simple kind of home based franchise, maybe we can get it done a little bit faster, but you never want to over promise. So I tell people be prepared for 60 to 90 days on average. Okay, great. So let's talk about your approach with your clients. So let's say someone's really interested in getting into business ownership and they want to get the funding piece squared away. What can they expect on their first call with you and beyond that? Conversation and education. I, I, you know, my job is to help people understand all of their options for funding that business so they can make an educated decision on which one they feel is the best for them. Because let's face it, everybody's different, right? Some people are not willing to have a lien on their home if the bank may require that. Sometimes for SBA, some people don't want to risk the retirement funds. So it's really just about talking through what all of those things look like. And truthfully, a lot of times what they come into the call telling me they want, it's completely opposite by the time they end the call. For example, it's very common for people to come into the call and say, I want an SBA loan. I don't want to touch my retirement funds. But that's because they don't know what the rates are today. And they think by touching the retirement funds, they're going to have to take a distribution and pay taxes and penalties on the money, which is not at all the case. So once they understand all of it, then it usually by the end of the call, again, over the last two and a half years of the trends I've seen, Most people say, wow, Rob's actually seems like the best option for me. But it is common for me to, Mike, to talk about things and recommend things that we don't even do here at Benetrans if I feel that there's something available to that client that's going to be cheaper, faster, easier. For example, we don't do home equity lines of credit, but it's common for me to say, hey, you might want to go speak with your mortgage provider about that. Because it's Typically the rates are going to be a tiny bit better, not a lot, but it's maybe a little faster and easy. Or if someone has a brokerage account, like a lot of money in a brokerage account, some people don't realize that they can often borrow against that as well. They just go right back to their brokerage firm and take a loan against that. That's pretty fast and easy too. So there's often a lot of things that people don't realize and we just talk through that. Yeah, that makes a lot of sense. And I can definitely relate to when someone comes to you with one expectation and they leave the call with something else that happens a lot where a candidate will come looking for a child education business. then maybe not at the end of the call, but they ended up investing in something completely different. Once they see what's out there and they'll buy a fitness concept or a home services brand. So that was something I had to adjust to because I figured if you are inquiring about a restaurant, you wanted a restaurant. But at the end of the day, once people see what's out there, sometimes they change their position. So. Why in terms of timing why is it important for franchise candidates to educate themselves? About the funding options really early on in the process Well, I think one of the reasons is what we just sort of talked about is that many people don't know the options that are available to them So once they understand what their options are then they have a better a better more accurate picture of what realistically their their capacity is for investment, right? So you wanna know early on if you can afford $150 ,000 investment or a $700 ,000 investment, just like if you're shopping for a home, you don't start looking at million dollar homes if you can only afford a $500 ,000 home. So it's really, and we have the ability to issue pre -qualifications for people too, if they want that, to where we're gonna review their financials and do a quick once over to give them a feel for what their maximum borrowing capacity is. if they think they're going to want an SBA loan. But yeah, it's about understanding your options so that they can, they and everybody that they're working with, you, me, all of us can maximize how they're spending their time so that you're pointing them in the right direction and not showing them things that maybe just really are not financially a good fit. Yeah. And I love that pre -qualification concept, just like when you're going to buy a home, that's a really good analogy because You know, you just don't want to be shopping in the wrong neighborhood or for the wrong type of home. Same thing in franchising. Like I would much rather have a candidate fully educated on their capabilities and their comfort level. And then once that's understood, we can then look at brands that kind of match. And it just, it's a big safe time saver because we're not wasting your time looking at things that just don't fit. It's so true. And, and, and honestly, I can't tell you how many people at the end of the call go, wow. Like this, reduced so much anxiety for me because I didn't realize that I could roll over extra money and use it to pay myself a salary, for example, or I didn't know how financially I was going to be able to do this. I didn't really think it was possible because I don't have a job or whatever it may be. And, and it just, you know, it makes people, it allows them to continue to move forward and, and reduce some anxiety for them, do it confidently. Very cool. So who is a great candidate for you? I mean, is there a certain liquidity or net worth or even credit minimum that you require? Or is it pretty much if anyone's looking into ownership, you'll guide Mostly the latter. know, net worth, honestly, we really don't care about that. And I think that banks don't really care about that. Often the franchise has a minimum net worth requirement, but I've seen people with two, three, $4 million net worths that weren't fundable because they didn't have any liquidity. It was all tied up in real estate or something. So I think the more important measures are liquidity, liquidity, liquidity. Cash truly is. King that's never gonna change. And that's if you're trying to borrow money, right? Then so if we're strictly talking like SBA, you need some liquidity again, plan on upwards of 30%, maybe only 20, but I think upwards of 30%. And you need solid credit. We wanna see everybody 6 .85 or better. If you don't have income, that's not necessarily a deal breaker. Because again, if we have enough liquidity, we can overcome that. If we can show the bank that they have enough cash to continue their lifestyle and make their monthly obligations, then we can still get them approved. So I guess we're looking for credit, liquidity, and home equity always helps, but you don't necessarily have to have it. Now, if we're talking ROBS, if we're talking retirement, using retirement funds, none of that matters. We don't care about your credit or your liquidity. You just have to have accessible retirement funds to use. So I could speak to that a little bit if you'd like. Yeah, I'm curious about that because, you know, there's people that are currently employed and they have their 401k with their employer and their people have left and haven't rolled it over. So what's kind of the basic framework around what we can use and what we can't use as it relates to ROBS? So we can use almost any type of pre -tax retirement account. We can use 401ks, IRAs, SEPs, simples, pensions, thrift savings like the TSP, the military version. There really isn't much that we can't use. What we can't use, however, no Roth IRAs, those are not eligible. We can use Roth 401ks, not Roth IRAs, and we cannot use inherited IRAs either. So those are the two no -nos. And then beyond that, I'd say about 70 % of the time, if they have a 401k that is tied to their employer that they're still working for, we can't access those for robs. But that still leaves about 30 % of the time that we can. So we're always gonna look into that if we think it's an option for the client, it's pretty easy for them to check to find out if they can and. And we can combine from multiple accounts and multiple people. So for example, if you have spouses and one of them has a 401k, one of them has an IRA, they can both invest retirement funds into the business. just typically, we say that Rob's makes sense at about the $50 ,000 mark. So you really want to have 50 ,000 or more in pre -tax retirement funds to invest in the business or else is probably really not a good fit. Okay. Really interesting. Thanks. So let's shift gears a little bit. Coming out of COVID, I know it's mostly in the rear view mirror, but if somebody took out a PPP loan for their small business or an EIDL, an economic impact disaster loan, and they still have an outstanding amount, does that have a negative impact on their ability to borrow? I guess let's talk SBA. As long as their debt to income ratio meets your standards? Yeah, it's not going to negatively impact them. Totally fine. Not gonna. So it's a non -issue. Non -issue. Very cool. You've covered a whole lot of ground. mean, this has been really interesting. Is there anything else, Kelly, you want to add to the mix before we wrap up? I guess I would say, I think, I would go back to Rob's a little bit, maybe, because that's, that's what most people don't know about. So if we can talk about that for a little bit, I think that maybe I can explain it a little bit more and give people a visual of, gosh, Really, what is this animal she's talking about? How does it work? So, yeah, the way I describe it that a lot of people can relate to, Mike, I use my own history in corporate America. When I was a drone in corporate America, I used to work for Sanofi Aventus, the pharma company, and I contributed to their 401k. And one of the investment options within my 401k was Sanofi stock. So as an employee, I could take my 401k by employer stock. So I did. And when I did that, and this is obvious, but you know, then my 401k is holding that Sanofi stock within it as an asset and the price fluctuates, right? It goes up and down based on the performance of Sanofi. The money I paid for that stock transferred directly to Sanofi's corporate bank account. They sold their stock, they got paid for it, and then they turned right around and they use it as operating capital. to pay our salaries, to fund clinical trials. That's really how the ROBS operates. The client is just both sides of that example. They're Sanofi, they're the corporation, the employer that is selling their stock to the employee and they're the employee using the retirement funds to invest in their own business and purchase their own stock. So, yeah, it is pretty cool. Yeah. And I just love the whole concept of, you you're able to... you know, set up the C corporation and buy stock in your own company and kind of bet on yourself to get the business going. You don't have to liquidate those assets. You don't have to pay penalties for early distributions. Like again, that's one where just people don't really know it exists. And once they find out about it, it takes away some of that fear of like putting their retirement assets at risk because they are with a franchise. It's kind of proven and they evaluated the economics and they validated with owners and they know. Okay, well, here's the risk I'm going to take to get into my business. you know, like you said, there a lot of them do that partial, we'll put 50 care more out of the Rob side and then leverage that for, you know, another 80 or 90 % financing with SBA. So it gives them more borrowing capacity. And it's real common, especially when people don't have income for us to combine Rob's with SBA, so they can show that extra liquidity that they have the money to pay their living expenses. So it's common for for to people to combine multiple options like that. But it's a really great way to fund a business. Yeah. Well, I've enjoyed working with you. I know I've sent you a few candidates over the years, and you're so thorough with really understanding their situation and making recommendations. And even the thing I like, and I'll tell candidates this, is you will recommend other companies' products if they're better for the client, which is, I think, kind of speaks to your integrity and... all that good stuff. I certainly enjoy working with you. one last time, anything else you want to add to the mix before we wrap up? I think we really did a pretty thorough job of giving everybody a snapshot. So I appreciate the kind words. I've enjoyed working with you too. You bring me the very best clients to work with. I definitely, I care about what I do, which is obvious. I've got a lot of integrity. and empathy because of my story. Like I said, I understand the fears and anxieties that go into it. I've looked at franchising before myself. So I understand all sides of it and really just want to help people make the very best decision for themselves. And even if that's not a franchise, right? It's just as important that you figure out what you don't want to do is what you do. So I really enjoy it and I'm happy to help anybody that wants to have a conversation and kind of learn about what their options are. Very cool. Well, anyone listening would like to connect with Kelly to discuss the custom funding solutions and strategies, contact me at FranchiseQB.com or on Twitter @QBfranchiseQB. I'll get you connected with her and her team. Thank you, Kelly, so much for taking the time to get in the huddle and speak with us about funding franchises with Benetrends. Thank you so much, Mike, for having me. I appreciate it. Have a great day. Yeah, you too. Thank you for listening to the Franchise QB podcast where you're at the helm of your future as a franchise owner. If you enjoyed the content, please rate the show and recommend it to anyone that might be interested in franchising. Make sure to visit FranchiseQB.com to subscribe to my newsletter and for an actionable playbook to go from walk-on to legend in your new business. Follow us on Twitter @QBFranchiseQB and join us every week for a new episode. See you next time. Visit FranchiseQB.com. take the next step of your journey towards wealth, independence, and franchise ownership. And remember, when working for the man gets old, you must do something bold. Thank you for listening.