Large or small, convenience stores can access financing programs that best fit their growth plans.
By Mark Battersby, Contributing Editor
Interest rates remain close to their historical lows but financing for many convenience store businesses continues to be elusive. Lower interest rates have translated into lenders and investors being more selective.
How then, can convenience store operators hope to fund the expansion of their operations?
Any quest for expansion funding, must begin with an understanding of the various types of financing, where that funding may be found, and at what cost. What type of funding can best help your expansion dreams become a reality?
Although retained earnings are often largely wishful thinking, a surprising number of businesses today have available funds even after paying all of their bills—including taxes. But expanding with internally-generated funds can be a very difficult process to plan for and implement.
The main consideration, obviously, is whether the business has sufficient internal cash flows to pay for expansion outlays.
In addition to those loans that a business often receives from its owner, a variety of other types of funding is available from a number of lending sources. A bank is probably the best-known source of funds for most businesses.
Typically, banks are the source for short-term lending, which is usually secured by tangible assets. Banks can help a convenience store business by providing funds to secure new equipment, machinery and vehicles.
The second area where banks can help is with working capital lines of credit to help the business expand its cash flow volume.
Selling stock in a convenience store operation doesn’t have to involve strangers. Selling company stock to the operation’s employees through an “Employee Stock Ownership Plan” or ESOP, is an often overlooked and usually misunderstood option.
With an ESOP, the incorporated convenience store business issues new shares of stock and sells them to an ESOP. The ESOP then borrows funds to buy the stock. The business can use the proceeds from the stock sale to its own benefit—say growth or expansion.
The c-store operation repays the loan by making tax-deductible contributions to the ESOP. The interest and principal on ESOP loans are tax-deductible, which can reduce the number of pre-tax dollars needed to repay the principal by an amount that depends on the operation’s tax bracket.
Remember, however, the tax shield does not help with S Corporations—they don’t pay corporate income taxes. Capital gains deferral, however, can make ESOPs attractive to these pass-through business entities.
The U.S. Securities and Exchange Commission recently approved new rules that will allow convenience stores and other businesses to more easily raise money from investors using newer technologies such as online “crowdfunding” sites. Crowdfunding allows those seeking money to post details of their project online and, hopefully, money will come flowing in.
Today, by advertising on Websites, called “funding portals,” those needing funds can reach out directly to investors.
Although large-scale crowdfunding was not previously permitted under federal securities regulations, today investors can receive equity (i.e. a “share” of ownership in the business), or bonds (i.e. providing a small loan to the business) depending on what the convenience store business chooses to offer.
Because small-business lending is becoming a big business with hundreds of millions of dollars raised from unique crowdfunding options, so-called “platforms” such as peer-to-peer lending, the practice of matching borrowers and lenders through other online platforms, is also growing.
The entire lending marketplace is an emerging segment of the financial services industry that increasingly uses online platforms to lend directly or indirectly to consumers and small businesses. Borrowers are able to gain access to funds quickly and typically at lower interest rates than many banks offer, making it an attractive loan alternative for many borrowers.
Often thought of as a lender of last resort, the U.S. government is an excellent source for a wide variety of economical financing. After all, the fed has a vested interest in encouraging the growth of small businesses. As a result, some loans, particularly those guaranteed by the Small Business Administration (SBA), have less stringent requirements for owner’s equity and collateral. In addition, many SBA loans are for smaller sums than most banks are willing to lend.
The biggest, and most popular SBA loan program, is the 7(a) Loan Guarantee Program. The SBA guarantees up to $750,000 or 75% of the total amount, whichever is less. For loans of less than $100,000, the guarantee usually tops out at 80% of the total loan.
As designed, a 7(a) loan can be used for many business purposes, including the acquisition of real estate, equipment, working capital or inventory. The loans can be paid back over as long as 25 years for real estate and 10 years for equipment and working capital. Interest rates are a maximum of 2.25% over the prime rate when the loan term is less than seven years and 2.75% if more than seven years.
The 7(a) program also offers several specialized loans, including the LowDoc Program for fast processing for amounts under $100,000. The “low documentation” program relies heavily on your personal credit rating and the convenience store operation’s cash flow.
504 LOAN PROGRAM
At the top end of the SBA loan size spectrum is the 504 Loan Program, which provides long-term, fixed-rate loans for financing fixed assets, usually real estate and equipment. 504 loans are usually made through certified development companies (CDCs)—non-profit intermediaries that work with the SBA, banks and businesses looking for financing.
Those seeking funds of up to $750,000 to buy or renovate a building or buy some major equipment, bring the convenience store operation’s business plan and financial statements to a CDC. Typical percentages for this type of package are 50% financed by the bank, 40% by the CDC and 10% by the business, or its owner.
In exchange for this below-market, fixed-rate financing, the SBA expects the business to create or retain jobs or to meet certain public policy goals, such as a municipal Enterprise/Empowerment Zone, a minority-owned business, etc.
Of course, one of the best sources of assistance—and in many cases funding for expanding convenience store operations—are the many state, regional and local economic development agencies. There are nearly 12,000 economic development groups in the U.S. The purpose of these groups is to provide economic growth and development in the areas they serve. They generally encourage new or expanding businesses to locate in their area of operation or to remain in the area.
Even those who are aware of public funding often have misconceptions about who will and will not qualify. Many of these programs are looking for businesses with proven track records. The state, regional and local agencies are willing to help them expand their sales, which in turn will help expand the tax base as well as increase employment.
While not always a source of expansion financing, a state’s office or agency of economic development can be a guide to regional and local funding.
Obviously, financing the growth of the convenience store business is a complex affair. Funding to help grow and expand the operation is, however, widely available to those operators willing to do their homework. Experts say comparison shopping for lenders, rates and terms is strongly recommended.