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Deals are being funded for franchise companies that understand what’s different about today’s lending market. “It’s not 2007 anymore,” says Coleman. “Franchisors need to come to terms with today’s lending environment and adapt to it.” Clearly, most have not, or they can’t!
Busy year for FranFund
Geoff Seiber, president and CEO of FranFund, a loan broker for franchises and small businesses, agrees with Coleman. If FranFund’s business in 2009 was any indication of franchise lending activity, it was a good year for franchising!
Indeed, it was a good year for franchise companies that embraced these principles:
- Previously, a lender’s due diligence focused on the franchisee, not the franchisor. Prior to the recession, lenders looked at franchising as an industry and not necessarily as 3,000 (plus or minus) brands within an industry. Now, there’s much more focus on specific brands. How are they performing? How are they helping to develop franchisees who can pay back their notes? “Many franchisors are unaware of this shift in due diligence,” explains Seiber. Or, are they just not capable of demonstrating to a bank that they can comply with today’s standards?
- There’s less money to lend. The stimulus packages haven’t done what they were supposed to do for small business lending. The situation will undoubtedly improve in time, but even in 2010 it at least appears there’s less money to lend. “Consequently, only the better deals are getting done,” says Seiber. Still, he’s staying plenty busy getting those deals done.
- Banks have changed their model from gaining market share, the old paradigm, to minimizing risk! Lenders now have regulators breathing down their backs and they’re not going to make a loan that they can’t fully understand and support. Franchisors that are reluctant to communicate with lenders, or who can’t help a prospective borrower deliver a transparent loan package, will find that their deals are being rejected.
- There’s more demand for loans than there is supply. Well, maybe not. Research by the International Franchise Association found that at one time in 2009 banks had 20% more cash on hand than in 2008. They just didn’t lend it. The government can kick and scream about lending into a recession, but banks need to be profitable. They want their loans repaid. Franchisees have to demonstrate how they’ll repay their debt before they can get a loan. Once again, the franchisor has work to do. “Today,” says Seiber, “franchisors must help their existing and prospective franchisees demonstrate to lenders why they are creditworthy.” Talking to the bank in behalf of a franchisee can go a long way toward securing funding. Yet, many franchisors won’t talk to lenders! Or don’t know that they should.
Franchisors have new role to play
“In the past,” says Seiber, “franchisors didn’t have to work so hard to help franchisees (and candidates) get funded. They could tell a prospective franchisee, ‘Go get your money lined up, then come back and talk to us about a franchise.’ But it doesn’t work that way anymore.”
Not if you want to boost your development numbers!
Want More From Bob Coleman?
If you’re a Texas franchisor or franchisee, you can hear Coleman speak on Feb. 24 in Dallas and Feb. 25 in Houston. He will make a luncheon presentation to the Franchise Leadership Forum. Registration is free! Also, Coleman will introduce you to 15 lenders at his Franchise Matchmaking event.
Want More From Geoff Seiber?
Order his eBook, Help Your Banker Say Yes! It contains advice for prospective franchisees . . . and it also tells franchisors what they need to do today to help their franchise candidates get loans!
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