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Can My Franchisees Get Financed?

Franchisor involvement in franchisee financing improves lender connections, results in better interest rates and more favorable repayment terms.

franchisees-financedCan my prospect get financing? This is the only question that a franchisor has when it comes to financing.  While this sounds self-serving, it is true.  How often do you feel disheartened after hearing a bank speak about its tight credit box and the specific types of franchises to which it is willing to lend?

Will I get paid back? This is the only question that lenders have. The franchisor must be involved to ensure successful responses to these questions. Here’s how to remove six troublesome roadblocks preventing your franchisees from getting the best financing outcomes.

Lending Hurdle No. 1: My franchisees and prospects need loans that are not fully backed by capital assets. 

U.S. Small Business Administration lenders are cash-flow lenders.  While lenders prefer a loan to be 100 percent collateralized, ideally by the business’ assets, it’s essential to an SBA loan’s approval that the franchisee demonstrate that the business’ cash flow will be able to repay the loan.  Franchise systems have a track record to leverage units that prove when franchisees reach positive cash flow and that they can repay loans.  Even with deficient collateral, your franchisees can get financing.  It is more difficult for you to find lenders, but they do exist.

The Franchise Registry can assess lender interest in industries based on activity levels.  Lenders made more than 58,000 activities on franchisors’ accounts on the Franchise Registry whose investment levels were less than $150,000.  The sheer volume of activities demonstrates lender interest in loans that are not typically collateralized.

Wiseman

Lending Hurdle No. 2:  My existing franchisees need small loans for working capital.  

The SBA launched a program called Small Loan Advantage.  SLA 2.0 is allowing more lenders to make it easier for franchisees to access capital for loans under $350,000.  The program did not get traction as quickly as anticipated, but that was to be expected; lenders are risk averse.  They are of the mindset that small loans have a higher likelihood of default and aren’t profitable.  SLA set out to change this thinking: small loans offer a similar risk profile to larger loans and can be profitable, which is a huge, cognitive leap for lenders.

The process must also be profitable for the lender.  How do you facilitate that?  Eliminate all barriers.  First, ensure that as many years as possible of your franchise contracts are approved as SBA Eligible on the Franchise Registry, and know which of the documents you need to sign for lenders when requested to do so.  Familiarize yourself with the SBA financing process by aligning with a company that knows SBA financing, such as Siegel Financial, Direct Connect Ventures or Bankers One Capital.

Wild Birds Unlimited recently initiated a small renovation requirement for its franchisees with capital needs of only $25,000.  Paul Pickett, vice president of franchise development, was able to arrange for a lender to provide a nationwide solution: an SBA lender provides 90 percent of the transaction online.   “We are laser focused on supporting our franchisees,” said Pickett.  “Therefore, part of our support is providing franchisees with tools and resources to obtain funding for both development and expansion of their business.  Growth has been an outcome of this support.”

Another avenue to look into is that SBA lenders have a product called a “cap line,” a revolving line of credit for seasonal business needs or for businesses that have inventory as their asset.

Edith Wiseman, CFE, is executive vice president for client solutions of FRANdata.

Edith Wiseman, CFE, is executive vice president for client solutions of FRANdata.

Lending Hurdle No. 3:  My franchisees don’t have access to better terms from conventional lenders.  

Sometimes the solution might be as simple as asking your existing SBA lenders to introduce you to the conventional side of their bank.  SBA lenders can refer deals to the conventional side of their business, if they have confidence in the economics of the deal.  Reliable information is the key to ensuring that a bank can underwrite the deal without the SBA’s government guarantee.  M&T Bank’s recent financing of a single-unit franchisee conventionally is a prime example for franchisors on how to get the best financing outcomes.

“Yes, we did end up approving a loan to a borrower for the [34-unit QSR] franchise,” said Sean McCabe, vice president, business and professional banking and SBA lending manager of M&T Bank.  “I spoke with the underwriter, and he said the Bank Credit Report helped him get comfortable with the deal.  And, they even ended up doing the deal conventionally, without an SBA guarantee, in large part because of the BCR.”

Lending Hurdle No. 4: I’m targeting multi-unit operators of other systems, but the franchisees’ lenders don’t want to finance the units under our brand.  

Franchise brands targeting multi-unit operators cannot have a laissez-faire attitude about financing.  However, many franchisors rely on the assumption that multi-unit operators bring their own banking relationships.  While that may be true for some, it’s hardly the case for all.  Multi-unit prospects need tools to help them shop lenders for your brand.  Banks that finance multi-unit franchisees are interested in financing start-ups in other systems for their clients, but lender confidence in the new brand is often lacking. The franchisor must offer tools to make it easy for the franchisee to seamlessly present his financing needs to a new lender.  The Franchise Registry has 5,000 lender members where franchisors can position tools for these lenders and connect with this vast network.

Lending Hurdle No. 5: Are there nationwide lenders that can finance all of my franchisees?

There are a few banks that have nationwide lending for select brands.  For instance, TD Bank recently hired business development officers who are dedicated to financing 10 to 15 brands nationwide. Otherwise, TD Bank lends only within its 14-state footprint.  Franchise America Finance has worked with 20 brands to finance their franchisees on a nationwide basis with SBA loans.  However, these types of nationwide solutions are not as common as franchisors would like them to be.  If your brand isn’t one of these 35 brands, your responsibility is to make it easy for your prospects and existing franchisees to go to any lender to get financing.  Companies such as BoeFly and the loan professionals mentioned above are great venues through which to disseminate your franchisees’ financing needs to a wide group of lenders.

Kate Bartosik is team leader, capital access of FRANdata.

Kate Bartosik is team leader, capital access of FRANdata.

Lending Hurdle No. 6:  Identify the right tools to make it easy for prospective and existing franchisees to go to any lender to get financing.

The first step is to ensure your profile is up-to-date on the Franchise Registry.  It is recommended that you sign-in at least once a month to monitor lender activity and record any changes in your franchise system.  You need to educate yourself about the failure rates of SBA loans and the U.S. Census Bureau’s North American Industry Classification System’s code failure rates for your brand.  These failure rates can be incorrect or an inaccurate proxy for evaluating the credit worthiness of your brand, but lenders don’t have time to try to figure that out when this public data shows unacceptable failure rates.  There are ways, though, to have your public SBA loan performance data analyzed and corrected.

Lenders need you to facilitate accurate underwriting information about your brand’s historical performance to benchmark against your prospective franchisee’s business plan.  Brands that do this are the ones that grow faster and have more satisfied existing franchisees.

With franchisor involvement in franchisee financing, franchisees will have improved lender connections, get better interest rates, more favorable repayment terms (interest-only payments for the first six months) and more.  All these factors work to optimize unit economics and positively influence opportunities for future development.

 Edith Wiseman, CFE, is executive vice president for client solutions and Kate Bartosik is team leader, capital access of FRANdata. The company operates the Franchise Registry website which connects more than 5,000 lenders to more than 1,600 franchises in nearly every industry. Find them at fransocial.franchise.org. 

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