In today’s negative economy, credit availability is challenging for the aspiring franchise business owner. Historically, a franchisor would introduce a new franchisee to a lender who was familiar with its brand and had a good sense of the risk involved with the investment. Today, franchisees are forced to work with local lenders who often don’t know have much franchise lending experience and very likely no experience with a particular brand. Local lenders now have to assess franchising risks. Before credit departments will actually look at the borrower’s application, they need to answer two critical questions. First, are they comfortable with franchise lending risks? Second, what do they know about the performance of the particular brand?
Franchisors can help their prospective franchisee by having the work done required by local lender credit departments. Whether the money is being requested of the local lender directly or through the SBA, there are several risk assessment tools that are increasingly important today.
The SBA Franchise Registry provides a dual benefit for lenders. It facilitates the SBA loan review process – a process which lowers risk to lenders automatically – and it validates that a brand is established and legitimate in terms of SBA requirements. Whether conventional or SBA focused, lenders who don’t find a particular brand listed on the Registry see that absence as a risk issue.
Although the Franchise Registry is a necessary capital access qualifier today, it is not enough. Local, as well as SBA lenders are demanding more analysis of franchise loans. What do credit departments want to see? Well, what they don’t want to see is the marketing information franchisors provide to prospective franchisees. They want to see information that assesses risks related to the franchisor and risks related to the franchise system.
Franchisors can have an analysis prepared around unit continuity highlighting the performance of a peer group of franchise companies with which to compare a particular brand’s unit activity. Without this, credit departments are left with making lending decisions on minimal and often misleading information. A bank credit report should address the underlying risks that all of a brand’s unit data represent to a lender. Without this data, their analysis with be incomplete.
Today franchisors also need to think like bankers. And if they have the work done for the banker, then the likelihood of capital access increases and everyone wins.