Shutdown's Impact on Franchise Funding

Strategies to move forward despite roadblocks caused by the federal shutdown in January.

By Morgan Johns

In the short span of a year, the Federal Reserve raised the fed funds rate four times, increasing prime from 4.5 percent in December 2017 to 5.5 percent as of Dec. 20, 2018. Although it’s nowhere close to the record high set in December 1980 at 21.5 percent, the fact remains that interest rates are steadily on the rise. What this means to small business owners is the cost of SBA loans are also on the rise, as the maximum allowable SBA rate is 2.75 percent above the prime rate. 

While interest rates on the rise affect a business owner’s bottom line, it pales in comparison to the issues that have occurred because of the U.S. Government shutdown in January. The shutdown, which began on Dec. 22, 2018, caused the closure of a long list of federal government operations and agencies, among them the Small Business Administration (SBA) and the Internal Revenue Service (IRS). The longest shutdown in U.S. history – which ended Jan. 28 with the threat of another shutdown still in play at time of writing – caused a ripple effect in the lives of American small business owners across the country that will be felt for months and possibly years to come.

Here are a few of the more immediate ways that the closure of these two agencies has affected our small business community.

IRS and Taxes

While new businesses have always had the ability to apply for an EIN (Employer Identification Number) by filing electronically, those that have experienced issues with an assignment, or for which a request was denied, need to wait to speak with someone at the IRS.

Although business owners must adhere to tax filing deadlines, there will be delays in the receipt of tax refunds. And while documents, such as the 1099 Form, will be printed and sent to individuals and companies for tax purposes, don’t expect to see them ahead of government-imposed deadlines.

Additionally, audits that have been scheduled or are in process were shelved due to the shutdown, and it will take time for the IRS to work through the backlog of cases.

SBA Loans

The shutdown has affected potential SBA borrowers, depending on their stage in the process at the time of the shutdown. 

If a candidate was approved for an SBA loan with the bank: For these business owners, the process was completed. They needed to request verification from the bank that they have received and been assigned a formal loan number by the SBA. If the bank received a loan number, then the loan request proceeded to a normal SBA closing and loan funds were disbursed.

If a candidate was not approved for an SBA loan: Candidates with an anticipated opening and the need for the associated start-up costs of more than 90 days should continue working with the bank toward the loan closing to remain in the queue for the time when the government shutdown ends.

If a candidate was not approved, and has a tight timeline to get their business open on time: Candidates with an immediate need for funding who need funding in the next 60 days to 90 days should ask the bank they are working with to fund a temporary bridge loan to get the location open, and then close the SBA loan for permanent financing after the government shutdown has ended. If the bank does not offer a temporary bridge loan, the candidate may want to consider finding a bank that offers bridge loans and can accommodate their timeline. 

Even now that the government has reopened, it won’t be business as usual. It could be weeks or even months for agencies to get caught up on new business. For business owners, both new and existing, who planned to use an SBA loan to open or propel their operations, they will need to search for alternate solutions to stay on track.

Advantages of ROBS

For some, a 401(k) Rollover for Business Startup (ROBS) may be the answer. A ROBS structure allows you to turn your 401(k), IRA or other qualified retirement plan into working capital for the business. With a fast turnaround (in some cases, 10 days from application to funding), entrepreneurs can get much-needed resources, tax-deferred and penalty-free, to start or expand their business. 

A ROBS can also be used in conjunction with an SBA loan, both as the cash injection necessary for the loan as well as increasing post-closing liquidity. More and more lenders are now embracing 401(k) rollovers to mitigate any perceived short comings in loan applications such as insufficient collateral, limited capital injection, or as mentioned, inadequate post-closing liquidity. Plus, this strategy can also help candidates qualify for multiple units.

Be proactive if an SBA loan is still needed for business funding. Even with the government closure, Benetrends, with one of the largest SBA Preferred Lending Program (PLP) networks in the industry, has continued to work with candidates to secure SBA loan funding. The combination of a ROBS strategy with an SBA loan has been proven and will continue to fund more franchisees and open
more franchises.

And that’s something to look forward to, now that the government is open for business once more.

Morgan Johns is Director of SBA and Bank Financing for Benetrends Financial Inc. Learn more here.