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Game-Changing Trends in Franchise Financing

September 22, 2015

Banks say they want to lend, yet many franchisors say they can’t get loans for new franchisees. Here’s how FPG bridged the gap.

Financing is an obvious and ongoing concern for franchisors and franchisees.

With the financial collapse of 2008, lenders stopped lending as franchisees, franchisors and other companies likewise stopped borrowing.  Like other businesses, banks circled their wagons and implemented a survival strategy that included stockpiling cash reserves, increasing bad debt reserves and restricting lending to only low-risk individuals and businesses — mostly meaning businesses that don’t need financing in the first place.

Franchisees capable of seven-figure investments continue to leverage their existing success to secure loans. Meanwhile, franchisors whose businesses are in the sub-$500,000 total investment range have slogged through the post-recession years by trudging through the SBA process or circumventing traditional lending altogether using quicker-and-easier-to-access funds like self-directed IRAs.  

The paucity of franchise financing in this investment range has created a huge drag on franchisor’s growth. Many franchisors report losing as many as 20% to 30% of franchise candidates who would have become franchisees if financing was more easily attainable when they were ready to sign a franchise agreement.  The long and difficult financing process can take the wind out of the franchise candidate’s sails, and some check out before seeing the lending process to completion. The resulting breakdown has forced franchisors to spend more money generating leads to make up for the elevated attrition rate.

Banks are eager to engage in franchise financing, but they face barriers that make it harder to make profitable small and mid-sized loans. FPG is working with lenders and franchisors to sweep away obstacles, help banks lend, and help franchise systems grow.

The game is changing

Now, lending is starting to change — and in a big way.  Banks are flush with cash to lend, which they need to get to work on behalf of their shareholders and to improve their bottom lines.  Franchisors are growing again. The economy is growing again.  Franchise candidates, who have learned how to save more and live on less, are better positioned to start businesses than in the recent past.

After many years of what felt like an uphill battle, business is moving again. So why is it still much harder for some franchise concepts to get bank financing than it was in the past? In a nutshell, banks face more regulations and auditing, which has driven up the cost of small business lending and made smaller loans less profitable — and sometimes downright unprofitable — for banks.  You will often hear lenders say, “It’s the same work and cost to do a $5 million loan as it is to do a $200,000 loan.”

This difficulty actually creates a major opportunity for franchise systems. To make a sound loan, banks have to understand the borrower’s business model, market position and likelihood of long-term viability, on top of the financial strength of the loan recipient. The banks’ underwriting costs of a loan are largely fixed, and when banks need to do reams of homework for each individual loan, it drives up their lending costs and kills margins, and therefore kills potential deals. Franchisors are excellent partners for banks because the bank can study the franchisor and its business model, and they use much of what it learns to speed along the underwriting process when working with franchisees.

Franchise Performance Group is working with top lending executives to streamline the franchise financing process — making it less expensive for banks to lend to franchisors and their franchisees — and to also create custom financial products that are tailored to the unique needs of franchisors’ businesses. At the heart of the arrangement are preferred lending arrangements that provide partner banks deep insights into a franchisor and an understanding of franchisees’ needs and performance metrics. By partnering with a franchisor and documenting most of the risk factors upfront, banks are able to better qualify franchisor’s opportunities, and therefore issue more loans more quickly. Suddenly, the cash reserves that banks have been eager but unable to lend can begin flowing to franchisees, especially those making investments in the sub-$500,000 category.  The loans help both new businesses get started and successful existing franchisees expand.

Case study

FPG client Nick Friedman of College Hunks Hauling Junk

College Hunks Hauling Junk worked with FPG and Bancorp to develop a vehicle leasing program that makes it easier for franchisees to start and expand their businesses.

For instance, one FPG client’s growth was constrained by the difficulty of getting affordable loans to scale up franchisee operations. College Hunks Hauling Junk franchisees had been purchasing used hauling and moving trucks from various vendors. The vehicles were different makes and models, with little consistency and varying levels of dependability. Truck reliability is critical. In their model, if a truck is off the road, both the franchisee and franchisor stop making money. To get more — and better — trucks on the road, FPG and College Hunks worked with Bancorp, one of FPG’s strategic banks, to craft a vehicle leasing program that helps new and existing franchisees lease new trucks for 5 years, fully wrapped with College Hunks graphics, fully warrantied, with no money down.  This conserves new franchisees’ cash, making them more resilient, and also allows existing franchisees to scale and put more trucks on the road without going out of pocket.  Also, Bancorp brought along its strategic partners, such as Electronic Payment Exchange, an industry-leading, tier-one payment processor who was able to significantly lower College Hunks Hauling Junk’s payment processing costs.

Thanks to a strategic partnership, College Hunks Hauling Junk franchise candidates can be approved for credit when they submit their franchise candidate application form.  The lending process is completed at the time they are ready to sign a franchise agreement, when the candidate is eager and ready to buy and start their business. Delays kill deals. This partnership kills delays.

Don Welsh, FPG principal in charge of financial services, said, “Both franchisors and the banks asked us to help them design financing programs for franchisors and franchise candidates that would result in more new franchise deals and greater acceleration for existing, growth-ready franchisees.”

Welsh added, “As domain area experts in franchising, we speak the language and understand the concerns of franchisors and franchisees.  We also speak the language and understand the concerns of lenders.  We are in a perfect position to help lenders and franchisors work together in unity to meet each other’s financial objectives. “

A better way to create lending relationships

Under the old way franchisors and banks did business, franchisors would secure one or more SBA lenders for start-up financing, perhaps a second lender to help existing franchisees expand under more favorable terms than a typical start-up, another company to handle credit card processing for mobile payments, perhaps another company for royalty ACH collections, and still another lender for vehicle or equipment leasing.  None of these vendors would have a very thorough understanding of the franchisor’s business, let alone the ability to leverage synergies by working strategically.  These suppliers would settle into a transactional relationship with the franchisees and franchisor.  But impersonal transactional relationships are not in the best interest of the franchisor, lender, franchise candidate or franchisees looking to expand.  

snapSmart franchisors are making themselves attractive to lenders by offering more lines of business like ACH and credit card processing. By aggregating their financial services and offering preferred relationships to a lender, franchisors create more purchasing power, translating into a lower cost of money, more personal attention and more available credit for all stakeholders in the brand.  These franchisors save themselves and their franchisees hundreds of thousands of dollars each year in interest and merchant fees and at the same time have cheaper, easier and faster access to capital and greater attention by key decision makers within the lending institutions.

The relationship is attractive to banks because it allows them to leverage their knowledge of the franchisor’s business model to make more loans without having to do as much paperwork.   This translates into fewer man hours to process a loan and therefore higher margins and greater willingness to lend.

Back to the basics of ‘relationship banking’

In the post 2008 recovery period, Boefly and indirect SBA loan brokers and packagers offer franchisors a reasonable stop-gap solution in a tight credit market, but they don’t solve the real problem – the need for an end-to-end franchisor and franchisee-focused financing solution.  These companies create transactions, but they don’t create relationships between the banks, the franchisor, and new and existing franchisees. This needs to change.

“Smart banks want relationships now – they know times have changed,” Welsh says. “They want to talk to the franchisor founder, CEO and the leadership team.  They want to know the specifics of the business models and important details about the franchisor such as the strength of their business model, long-term viability in the marketplace, and quality and vision of a company’s leadership team. The problem the banks had in the past is they haven’t had the time, resources or expertise in franchising to conduct the appropriate diligence on the franchisor.  A balance sheet can’t tell a bank whether or not a franchisor is at or near a tipping point, nor can it tell them whether the franchisee model has long-term sustainability in the marketplace.  Banks are now looking at franchise domain area experts like FPG to know what quality franchisors look like.”

How FPG can help with franchise financing

FPG Financial Solutions is the optimal lending solution for franchisors that offer franchises for under $500,000 and whose potential franchisees have been stuck in the slow and inefficient gears of traditional lending.

FPG acts as a channel between lenders eager to meet the needs of franchisors and franchisors equally eager to help franchisees get started and help them grow their businesses.

As veteran domain area experts in franchising, we have worked with hundreds of franchisors representing a wide range of industries and investment levels. Lenders seek us out because of the depth of our franchising industry expertise and our relationships with hundreds of franchisors.

The products we have developed are designed to fit the franchise-buying process — eliminating delays that can kill deals. The entire lending process is expedited and franchise candidates are often approved for credit at the time they submit their franchise candidate application form. Additional financial products are tailored to the individual needs of the franchisor’s business — and help franchisees expand while also allowing banks to partner more deeply with brands and enjoy a strong return on their investment while providing more favorable terms for franchise partners.

Do you need help achieving a breakthrough?

Franchise Performance Group helps franchisors build iconic brands by helping them improve all phases of their franchise recruitment process, including lead generation, recruitment process design, franchise sales and departmental leadership training and support, and franchise financing.

To start a conversation with us, email Joe Mathews Joe@FranchisePerformanceGroup.com or Text/Call 860.309.1484

About Franchise Performance Group

Franchise Performance Group is management consulting firm specializing in franchising, specifically in the area of franchisee recruitment and financing.

For more information on Franchise Performance Group, visit the rest of our website www.FranchisePerformanceGroup.com.

About Joe Mathews

Joe-MathewsCEO and Founder of Franchise Performance Group, Mathews has 30 years of experience with such national chains as Subway, Blimpie, Motophoto and Entrepreneur’s Source.  Mathews is a leading authority in lead generation and franchisee recruitment best practices.  He is a regular presenter at IFA conferences and was an instructor with the ICFE (Institute of Certified Franchise Executives).  Mathews is also an author /co-author of three  books on franchising, Street Smart Franchising, Franchise Sales Tipping Point with Thomas Scott, and Developing Peak Performing Franchisees. He has also had articles featured in USA Today, The Wall Street Journal, Business Week, Inc, Entrepreneur and Fortune.

About Don Welsh, FPG Capital

don-welshDon joined FPG Capital in 2013. Don started his career at ARAMARK, becoming one of their youngest executives, serving in their Sports and Entertainment Division. Don founded Aspeon Solutions in 1999, a publicly held Information Technology where he was instrumental in securing funding from Credit Suisse. Don was recruited to join FreedomPay, a payment and loyalty company, funded by Nokia and Goldman Sachs in 2000 as COO. Don and his partners founded Simple Tie Ventures, LP in 2005 a small Private Equity Firm. Currently, through Simple Tie Ventures, LP, Don and his partners have invested in a multi-unit Sonic franchisee in the Philadelphia market, a 17-acre golf facility in the Philadelphia area, a construction management firm and a solar development company.