Creative financing that succeeds - includes related information on loan proposals and lending sources - Franchising Special Guide

Nation's Business, April, 1995 by Meg Whittemore

Lenders and franchisors are making it easier for franchisees to get the money they need to launch a business.

You want to buy a franchise, and you've done all your homework. You are ready to make the purchase--provided you can line up the financing. Where do you turn?

Regardless of the cost of the franchise, you likely will end up borrowing at least a portion of the start-up capital to pay for real estate, equipment, inventory, or business construction. And the news from the franchise-financing front is good.

In their efforts to serve more small businesses, community-based as well as national banks and other lenders are becoming more knowledgeable about franchising and extending their reach in that field. Many banks now have departments that specialize in franchise and other small-business loans. Often, a specific loan officer is designated to handle applications for franchise loans. Some nonbank lenders are backing franchisees who in the past would have had difficulty securing a loan. In addition, the franchisors themselves are taking a more active role in helping franchisees secure the needed financing.

A Franchise-Friendly Approach

The formation of franchise-financing departments by banks and nontraditional lending institutions is a sign that lenders are taking franchising seriously--primarily because of the positive track record of repayment that franchisees have established. "It's a good piece of business if you can get latched into a franchise system that is growing," says Frank Bridges, assistant vice president at Virginia Beach Federal Savings Bank, in Virginia.

"Franchise lending is a significant growth area, which is good news for the borrower," says Deryl Schuster, president of Emergent Business Capital, Inc., in Wichita, Kan.

Lending institutions are working to design loans that don't leave the franchisee borrower feeling strapped. "It's still tough to finance against something you can't get hold of," Bridges says. "But there is more creativity now and a lessening of the cookie-cutter loan formulas."

Bridges heads Virginia Beach Federal's franchise-financing department and works with franchisees on loans from $50,000 to $6 million. "We have the expertise to structure debt in a way that allows the franchisee to comfortably repay," he says.

While traditional banks are examining franchise financing as an area of potential growth, nonbank lenders, such as Stephens Franchise Finance, based in North Little Rock, Ark., are stepping up their services to the franchise community, looking beyond the types of franchises traditionally granted loans.

One of the frontier areas in franchise finance is in funding nontraditional sites, such as kiosks and pushcarts. "We are finding that most lenders are hesitant to lend when the location doesn't involve hard real estate," says Donald Hakes, vice president of Stephens' Northeast region. Hakes says the company is developing a program to finance nontraditional sites because "we see 50 percent of the future growth in franchising will be in nontraditional sites."

A relatively new arrival to the franchise-financing arena is the National Cooperative Bank, a congressionally chartered financial institution based in Washington, D.C. It was created in the late 1970s to provide financial services to business co-operatives that supply products and services to franchises and other small businesses. Earlier this year, NCB announced it had sold to the secondary market $250 million in equipment loans for small businesses--including franchises.

The Franchisor's Role

In the past, would-be franchisees often found themselves alone when trying to secure a loan. While franchisees continue to bear the burden of finding capital for their business, franchisors are helping out in a variety of ways--including co-signing loans, entering into joint ventures with franchisees, sponsoring "sweat-equity" programs (where the franchisee works off part of the total start-up fee), and offering franchisee-in-training strategies.

Although few franchise companies offer direct financing, many have developed long-term relationships with banks in their markets. Such banking relationships offer a third-party endorsement for loan applications. Other franchisor services include help with the loan application and the supporting materials required by banks. Many franchisors also offer various other financing arrangements, including leasing programs for equipment, deferred payment of the franchise fee, revolving credit for inventory purchases, group buying discounts, and financial consulting services to help would-be franchisees get started.

At the same time, financial institutions are paying more attention to the financial health of the franchisor--as well as that of the potential franchisee. "We consider the financial strength of the franchisor more important than the franchisee's financial picture," says Donald Hakes of Stephens Franchise Finance. "When we are lending, we want to share the risk with the franchisor."

Franchisee-In-Training