Special Report | December 2010 | By Jordan Melnick

Where’s the Money Now?

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With banks “gun shy,” Cassity tapped into private sources of funding to take advantage of “striking opportunities.” Securing private money depends a lot on who you know, as opposed to the more systematic process of securing a commercial loan. But with “trillions of dollars sitting on the sidelines,” Cassity says more of it will flow into the restaurant industry despite the high risk.

“Investors definitely take a greater risk than if they left it in a CD or a savings account,” he says. “But they risk earning nothing on their money” if they keep it under the mattress.

Saladworks, which is based in Conshohocken, Pennsylvania, is exploring a different solution to the financing issue. In an effort to continue expanding beyond its 11-state operating region, the company launched an internally funded leasing program that gives operators a chance to own a Saladworks franchise with only a $75,000 initial investment.

Under the agreement, Saladworks supplements the balance of the startup costs and takes a percentage of the store sales. At the end of a 10-year lease plan, the franchisee has the option to purchase the store outright.

Steck, the company’s president, says the idea arose directly from his frustration with the slow process of bank lending.

“We were not getting no's,” Steck says. “We were just not getting yes's.”

In June, the company decided to take matters into its own hands and launched the leasing program. So far, two operators have taken Saladworks up on the offer, and Steck expects to ink 10 deals through the program by the end of the year. While the company assumes a lot of risk in fronting the lion’s share of the start-up costs—opening a Saladworks can cost from $350,000 to $500,000—Steck says he is “willing to bet the farm” on experienced operators in order to grow the company brand.

For the operators’ part, the profit-sharing arrangement is not ideal, but with limited access to traditional financing, the program gives them a chance to open new restaurants with a relatively low buy-in.

“A franchisee with very little money can essentially have a restaurant built out for them completely turnkey, soup to nuts,” Steck says. “We just give them the keys. ‘Here you go. Here’s your store.’”

While the program grew out of the credit crunch, Steck says he plans to make it part of Saladworks’ growth strategy even after the economy picks up.

“We’re going to be doing this long term,” he says. “I don’t see why not.”

“This is what makes entrepreneurship in America so exciting. Companies all faced with the same dilemma are coming up with different approaches.”

For franchisees in systems without corporate financing options, other nontraditional lines of credit are available, like the ones offered by On Deck Capital.

In 2006, two years before the recession hit, Mitch Jacobs founded a company that no one seemed to need. On Deck Capital offered loans to small-business operators who had been rejected by commercial banks, none too common amid a historic period of loose credit.

Now the company has emerged as a lifeline to small business operators, particularly in the restaurant industry, who are unable to secure a commercial loan.

The company’s short-term loans average $30,000 and carry annual interest rates from 18 to 36 percent—multiples higher than typical bank rates. It decides whether to advance a loan based on a computerized data-gathering system that looks at a business’ online banking account, credit card processing, credit scores, and other factors. This saves business operators from lugging stacks of records to banks to initiate a lengthy application review.

“It is 80 hours of labor boiled down to 15 minutes,” Jacobs says.

To date, On Deck has provided more than $80 million in loans, much of it to restaurant operators, who make up 20 percent of its clientele. On Deck’s typical restaurant client has three to four locations, and revenues from $250,000 to $4 million. Instead of its clients paying back the loans in monthly installments, On Deck automatically receives daily micropayments of about $100 from their bank accounts.

Jacobs criticizes commercial banks for dealing with small businesses as if they were individuals and putting undue emphasis on the applicant’s personal credit score.

“It was very clear to me back in 2006 that the U.S. financial system had no category of products that was for Main Street small businesses,” Jacobs says. “The banks were offering consumer products to Main Street small businesses as a work-around.”

In looking comprehensively at a business’ financial viability, On Deck is a lending model tailored to small businesses. And with so many aspects of the financial system being called into question, it may be a sign of where commercial lending is headed.

“This is a rare moment in time where some really good things could happen for [small businesses] regarding access to capital,” Jacobs says. “Because the personal credit scoring system is regarded as broken, banks are going to have to seek an alternative … that works in favor of the small business owners instead of against them. And that has not been the case.”

For now, companies like On Deck and initiatives like Saladworks’ internal leasing program show how American business is rethinking financing in the wake of the Great Recession.

“This is what makes entrepreneurship in America so exciting,” Steck says. “Companies all faced with the same dilemma are coming up with different approaches to the same problem. That’s kind of cool.”

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