Franchisee or Prospective Franchisee Financing: There are ONLY 2 Questions!
Can my prospect get financing? This is the only question that you as a franchisor have when it comes to financing. While this sounds very self-serving, it is true. How often do you feel disheartened with dampened hopes after hearing a bank speak about their tight credit box and the very specific types of franchises to which they are willing to lend?
Will I get paid back? This is the only question that lenders have. You, as the Franchisor, must be involved to ensure successful responses to these questions. Here, we identified how to remove the six troublesome roadblocks preventing your franchisees from getting the best financing outcomes possible.
Lending Hurdle #1: My franchisees and prospects need loans that are not fully backed by capital assets.
SBA lenders are cash flow lenders. While every lender prefers a loan to be 100% 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. As a franchisor, your system has a track record to leverage of units that prove when your 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 over 58,000 activities on franchisors accounts on the Franchise Registry whose investment levels were less than $150,000. The sheer volumn of activities demonstrates lender interest in loans that are not typically collateralized.
Lending Hurdle #2: My existing franchisees need small loans for working capital.
The SBA launched a program called Small Loan Advantage (SLA) 2.0. SLA 2.0 is allowing more lenders to make it easier for franchisees to access capital for loans under $350,000. Small Loan Advantage did not get traction as quickly as anticipated, but that was to be expected. Lenders are risk averse. They are of the mind-set that: 1) Small loans have a higher likelihood of default and 2) Small loans aren’t profitable. SLA set out to change this thinking to: 1) Small loans offer a similar risk profile to larger loans and 2) Small loans can be profitable, which is a huge cognitive leap for lenders.
Furthermore, the process must be profitable for the lender. How do you facilitate that? Eliminate All Barriers. First, make certain 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. You can do this by aligning yourself with a company that knows SBA financing, such as Siegel Financial, Direct Connect Ventures or Bankers1 Capital.
Wild Birds Unlimited recently rolled out a small renovation requirement for their 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. Paul Pickett is the Vice President of Franchise Development. He was able to arrange for a lender to provide a nationwide solution. The nationwide solution is an SBA lender whereby 90% of the transaction is accomplished online. Paul says, “we are laser focused on supporting our franchisees. 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- 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.
Lending Hurdle #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’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. I spoke with the underwriter, and he said the Bank Credit Report (BCR) 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.”
–Sean McCabe, Vice President, Business and Professional Banking and SBA Lending Manager, M&T Bank
Lending Hurdle #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 its 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 #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 has recently hired BDOs that are dedicated to financing 10-15 brands nationwide. Otherwise, TD Bank only lends within their 14 state foot print. 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, the responsibility is on you to make it easy for your prospects and existing franchisees to go to any lender to get financing. Companies like Boefly, and the loan professionals mentioned above are great ways to disseminate your franchisees’ financing needs to a wide spread of lenders.
Lending Hurdle #6: Identifying the right tools to make it easy for prospective and existing franchisees to go to any lender to get financing.
The very 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 NAICS 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 the provision of accurate underwriting information about your brand’s historical performance to benchmark against your prospective franchisee’s business plan. Brands that do grow faster and have more satisfied existing franchisees than brands those that don’t.
With franchisor involvement in franchisee financing, franchisees will have improved lender connections, get better interest rates, more favorable repayment terms, like interest only payments for the first 6 months, and more. All these factors work to optimize unit economics and positively influence opportunities for future development.