What makes franchise finance difficult?

Getting finance could make or break your ability to get into your own business.

780X660Px What Makes Franchise Finance Difficult To Get

Access to finance remains an ongoing challenge for the franchise sector.

Many franchise systems see lenders as the problem. However, in many cases the real problem is the franchisor themselves.

From our ongoing work with the lending community we see four main issues:

A basic lack of understanding of the lender’s business.

Lenders are in the business of lending money and achieving an acceptable return on that activity.

Examples of factors that reduce or eliminate the returns include:

  1. High origination (initial loan processing) costs
  2. Margin pressure (reduced interest rates or an increased cost of wholesale funds) 
  3. Excessive loan administration costs (arrears or frequent information requests)
  4. Loan write - offs. 

In relative terms, franchise lending is often a small percentage of the overall business lending portfolio for major banks and in practical terms many franchise transactions may not be overly attractive in the way they are presented.

It is good to see an increasing number of franchise brands positioning themselves as “Lender Friendly” but most need to do more to make themselves more attractive to lenders.

Poor Lender Relationships 

Franchisor / lender relationships are no different to any good relationship. They are built on trust, respect and a good experience for both parties.

Some franchise systems don’t make a very good impression with lenders. They initially approach lenders almost with a sense of entitlement around the establishment of franchise lending programs rather than a partnership approach or taking the time to understand what might make their system and their franchisees attractive to that lender. 

Some franchise systems don’t do enough to support underperforming franchisees which can ultimately lead to losses for lenders. 

Some franchise systems are outspoken or public in their criticism of lenders. This makes forming or maintaining a relationship difficult.

Poor quality information

More information enables a stronger assessment and ability to take on risk. Less information means taking on less risk and no information means taking on no risk!

Most franchise systems do not provide quality information to assist lenders. There is information that is nice to know and information that needs to be known.

Information provided to lenders needs to be accurate, relevant and timely. The information should also be in a language that lenders understand and trust.

At a franchisee level, wrong or incomplete information can seriously reduce the chances of a loan getting approved. Quality franchise systems will ensure their franchisees are well prepared and well advised before they put in their finance application.

Partmership Approach With Lender Franchisor And Franchisee On Franchise Buyer

Accountability or Ownership

Quality franchise systems generally take it very hard when a unit is not performing well. They pride themselves on identifying the warning signs early and then mobilising resources to ensure the best outcome for everyone involved. 

Underperformance can happen for a number of reasons; some connected to the franchisee, some attributable to the franchisor and some outside the control of both parties. 

Lenders do not expect every site and every franchisee to be perfect but they do want to deal with franchise systems that stand behind their brands, regardless of what is causing that underperformance. They are looking and a relationships and a partnership approach.

Quality brands use instances of underperformance as proof points of their commitment to their franchisees and lenders. On the other hand, and when everyone needs it the most, some brands do little or nothing to improve the outcome for lenders. 

When a lender takes a loss, or has a poor experience with a particular brand, they will naturally look elsewhere for their next lending opportunity.

The Final Word

Quality brands value and invest heavily in their lending relationships. They know how important accessing finance is for growth, they know how important good information is and they know how a lenders experience with just one franchisee can influence their view of the whole brand.

As a prospective franchisee it is reasonable to ask them what they have done to make themselves “lender friendly” and which banks are actively writing new loans for their brand.

Listen carefully. Their answer may tell you more about the brand than just their lending relationships.