No business can afford to rely on one lender for all its needs.
The current lending environment has significantly affected many franchisors’ ability to meet their development and remodeling goals. Franchisors are beginning to see that franchisees who may be identified as the most qualified to open and operate a new location, may not have access to the needed capital to take on the project. As a direct franchise lender, our company has seen various scenarios contributing to this gap:
- Franchisees are unable to leverage existing relationships for additional funding. Many banks and creditors have reduced their exposure limits for individual business owners as a way to mitigate risk. This is especially a concern for multi-unit and multi-concept owners. Diversity to capital is important more so than ever in this market. No business can afford to have all its eggs in one basket as it may not be able to rely on one lender for all its needs; especially if the lender can only offer one type of finance product.
- The pool of direct lending funds available in the market is shrinking. This has created a situation where brokers are drawing off a limited set of funds from larger directlending sources. Here, the exposure issue comes into play again. Franchisees attempting to access approvals from brokers, may find themselves hard-pressed to secure lending as the larger direct lenders impose exposure caps for the individual franchisee, regardless of which broker has originated the transaction.
The “lending lockdown” has created a need for franchisors to be more active in securing lending relationships to ensure capital is flowing through their system to support development, remodeling and mandated or recommended equipment and technology replacement. Over the past 18 months, this strategy has become vital to the health and growth of many brands. Franchisors taking an active role in their franchisees’ ability to access capital can help to narrow the gap between the need and availability of capital by taking the following steps:
- Don’t view your lending partner as a commodity, but as a true partnership.
Support your lender and their efforts, and that doesn’t end with getting your franchisee approved and funded. Assistance will be needed for certain transactions or situations before, during and after the financing is in place. Lenders must feel comfortable that a franchisor is aligned with them to maximize the lender’s credit window. In the best situation there is a financial commitment between the franchisor and the lender. In other situations, the franchisor’s ability to provide sales/revenue reporting at the store level or share detailed remodel, development and upgrade schedules is a good foundation for building a system-wide lending program. Let’s not forget communication. If you, the franchisor, know of a failing operator and are taking proactive steps to assist or replace them, call your lender with that information. Your lender will be thrilled you are taking proactive steps to “keep the lights on,” which will instill additional trust for future lending opportunities. - Understand how your lending partners evaluate risk.
The scope goes well beyond same store sales. Lenders look at various personal, business and franchise-system variables to determine credit risk. Equally important to the performance of an existing operation is the franchisee’s personal and business credit, and the performance of the franchise system as a whole. Using your existing processes to proactively identify signs of trouble and resolve those issues is an important part of maximizing the credit window for your franchisees. It’s important to know that negative trends across your brand could affect access to funding for your entire system. The biggest factors determining whether or not a franchisee will get approved for financing are:
- Personal and business credit profile: Defined in terms of FICO, Paydex, bankruptcy score and also includes items such as suits, liens and judgments.
- Franchise concept strength: Good lenders will leverage the franchise disclosure document to understand concept growth and profitability.
- Number of units/stores owned by the individual and time within the concept: Proven operators looking to expand will always be a different credit risk than someone new coming into a system.
- Current debt levels (personal and business): Can the franchisee reasonably cover the new debt they are requesting?
Franchisors and their associations have been extremely vocal and diligent in publicizing the lack of capital available in the marketplace and many have fallen significantly short of accomplishing their development plans because of this. The credit crunch has struck the acquisition of new franchisees the hardest and the economy has hurt those willing to put up the investment needed to launch a new location. This, in turn, has led many franchisors to retool their development strategy to focus on current good operators to open new locations or assume locations from poor operators. This initiative requires the franchisor to ask some big questions that are not always easy to answer. For example:
- Which franchisees are best suited for expansion?
- Which franchisees have the best likelihood of getting approved for a loan?
Many articles and industry experts focus on tracking sales data closely and conducting periodic on-site visits to ensure the corporate structures are being met. One could assume that strong sales equal good operator which in turn equals a great development candidate. But that doesn’t always hold true.
Franchisors need to ask themselves how much time and energy is wasted in developing a region or territory with existing owners, when in the end the franchisee cannot get approved? Understanding which franchisees are most likely to be approved and focusing your development resources around those candidates can help ensure your system’s development plans become reality. There are easy-to-use services in the market that can be leveraged to answer these questions and even to compare the financial strength of your franchisees against those of your competition, down to the local level. With availability to capital being the single biggest factor of growth, securing a direct-lending relationship and understanding your franchisees’ credit profile is more important than ever to protecting the growth of your brand.
Robyn Gault is the director of strategic accounts for Direct Capital Franchise Group. She can be reached at 603- 433-9476 or rgault@directcapital.com . Direct Capital Franchise Group is a national direct lender with nearly 20 years of experience providing financing to leading franchise brands for new store development, remodels, acquisitions, equipment upgrades, and more. Programs offer fixed payments, 100 percent financing and express approvals within 24 hours.
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