Thursday, April 7, 2011

Easy way to get loans for franchisees?

The International Franchise Association didn’t over-promise in pitching its Small Business Lending Summit as an opportunity to hammer out solutions to restaurant franchisees’ capital crunch. A packed room of attendees heard repeatedly today that lenders would extend loans more readily if applicants’ franchisors provided detailed data about the brand’s overall performance.

Bank representatives said the rusted machinery would be greased significantly if brand headquarters shared such nitty-gritty info as long-term sales plans, what failed stores are fetching when they’re sold, and what HR support is available to franchisees.

Several noted that medical-related small businesses are having an easier time than restaurants and other franchised businesses in securing growth capital. “The reason is there’s a tremendous amount of data available in that sector,” said Joe DiNicola of Bank of America.

“Today’s underwriting is different than yesterday’s underwriting. When the story can be supported with the franchisor’s data, that story becomes stronger,” he asserted.

The discussion prompted one member of the audience to grab a microphone and suggest that franchisors put systems into place and standardize the information they pass along to potential sources of licensee loans.

The give-and-take grew out of what panel moderator and celebrity business journalist Geoff Colvin called a “giant disconnect between lender and borrower.”

He noted that the conference was convened because franchisees are starved for financing. Yet lenders on the program attested that they not only are willing to lend more money to franchisees, but are aggressively prowling for those sorts of deals.

Ironically, they asserted that a major part of the problem is insufficient demand.

“We’re seeing a lot of hesitancy,” said Mary Navarro, a senior EVP for the Midwest’s Huntington Bank. “A low sales volume might be part of that hesitancy, and [franchisees] have learned to do more with less.”

The discrepancy between franchisees’ complaints and lenders assertions had Colvin scratching his head. He asked Navarro, “What explains the perception that franchisees can’t get credit?”

After some give-and-take, lenders acknowledged that they’re using different criteria post-Great Recession to decide who gets money. They’re looking for a convincing track record and far more detailed information about the ventures they back.

“Document, document, document,” advised Tony Wilkinson, CEO of the National Association of Government Guaranteed Lenders.

Banks are also looking for an on-going relationship, not a one-off transaction. Her company is loath to make one-shot loans because it wants to lend money on an ongoing basis with businesses in the neighborhood.

A representative of Regions Financial Corp. suggested that franchisors choose a dozen banks nationally, educate those institutions about their concept, and then work exclusively with then.

Pens were scribbling furiously as she spoke. I bet the notation was starred and underlined a few times.


Dem Politico said...

Peter: thanks for this article. We've thought about how to improve this disclosure issue, and propose the following disclosure format which focuses on the location level economics:

(1) display average weekly net sales per location (not gross sales), for the last three prior calendar years.

(2) display a three prior calendar year running EBITDAR (earnings before interest, taxes, depreciation, amortization and rent), in dollars and percentage, arrayed by quintile
(top fifth, second fifth, etc)

(3) owners return, salary, draw, expenses, etc are excluded.

Every lender in the world needs these numbers. If the franchsisor cant get to a system number, then the percenatgae of reporting locations of total should be noted.
Franchisee Associations could be tasked to help in the data collection process.

John A. Gordon
Pacific Management Consulting Group

albert george said...
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