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Trying to find a loan for a franchisee business is like finding a needle in a haystack. If you are not a mature franchisee of a large, nationally-branded concept, locating senior debt money for franchisees, until recently, has pretty much been limited to SBA lending. Well, times are changing. Over the last several years, I have seen local and regional banks develop an interest in lending to franchisee businesses. These banks can be a viable and welcome alternative to the large national lenders and commercial finance companies. These banks can provide money for development, acquisitions, and reasonable growth. Many of these regional and local banks are in need of loans, and with some good planning and salesmanship, money should be available from these sources.
How does a franchisee approach these banks? Let’s look at the necessary steps.
- 1. The first step is to determine prospective banks. These are banks that actively seek commercial loans and have a strong commercial lending group. Ask your accountants, lawyers or franchisor for names of banks who they know to be receptive to franchisee or multi-unit retail loans. Even if a particular bank has not done a loan to your franchise concept (or has never done a franchise loan), they may be a good prospect if the bank is open to entrepreneurs and cash-flow lending.
- 2. After finding a prospective bank, the next step is to find a senior commercial loan officer who seems willing to take the effort and time to understand your business. Also, assess whether there is chemistry with this loan officer (yes, even bankers have chemistry).
- 3. In preparing for your meeting with the loan officer, be sure to bring the following information to the meeting:
- a. In general, prepare a solid business plan. Do not prepare long, boring projections that are unrealistic; instead, prepare a four-to-five page business plan that explains the components of your existing business, plans for development, including issues such as key staffing and other outside resources that may provide stability for your business.
- The business plan should include:
- i. A detailed “sources and uses” statement that incorporates a clear description of what the uses are (particularly being very specific as to “fixed assets” and downplay intangibles).
- ii. Reasonable pro formas that can be documented and supported by past operations of the business and other potential information obtained from other franchisees or the franchisor.
- iii. Pro formas reflecting high fixed-charge coverage for the desired loans.
- b. Show how much cash will be put in the business, how much equity already exists, and provide a clear understanding of the company’s balance sheet. If your business balance sheet has negative net worth, prepare a supplemental schedule explaining how the negative retained earnings arose. In many cases, negative retained earnings are created by start-up costs, depreciation, and non-cashed items.
- 4. Once you have found a prospective bank loan officer and have presented a business plan, it is critical to educate this loan officer as to the value and safety of franchise lending. The following are ways to familiarize the loan officer and the bank with your concept:
- a. bring them to your stores;
- b. let them see and touch your business;
c. let them look at the cash registers and feel the certainty of cash-flow that is generated in your business;
- d. have them review your concept’s UFOC;
- e. let them visit other franchise stores that may not be yours; and
- f. have them pull up your franchisor’s website.
Hopefully, all of these ideas will bring comfort to the loan officer and the bank about the viability of your concept and business.
- 5. Ask direct questions of the bank officer. Specifically, what will it take to sell the officer’s loan committee to make this franchise loan? What roadblocks exist in getting this loan approved? Address any roadblocks prior to the officer speaking with his or her loan committee.
- Actively engage your accountants and lawyers in the discussion with the lender so they can address any legal and financial questions and constraints before the loan is taken to the loan committee.
- 6. Contact the franchisor. Discuss what your franchisor can provide to the lender such as inter-creditor agreements and other documents that can help in providing collateral and a safety net to the lender.
- 7. Even though you will be required to provide a personal guaranty, ask the lender to look at this loan as being a “straight” business loan.
- 8. You may also have to provide outside collateral. Do not volunteer any outside collateral before you have tried to get the lender comfortable with the business collateral.
In general, provide the bank and loan officer with the best possible picture of your business. Make sure the loan officer has become your advocate and clearly has a personal stake in getting your loan request approved. A loan officer that goes into a lending committee half-hearted will likely not get good results.
Once your loan request has been approved, you will receive a term sheet or commitment letter. This is the time to negotiate the transaction. Scrutinize the loan term sheet or commitment with your attorney and accountant to see if it satisfies your needs for maintaining and growing your business. If the bank does not show much flexibility in negotiating the loan commitment or term sheet, your option is to recognize this fact and determine whether the loan is really necessary to your business’s success.
The final process is the closing. The closing is normally handled by technical people, and the key element to any closing is to be sure that no money falls through the cracks and there are no excessive closing expenses. Although bank closings are normally cheaper than closings by commercial finance companies, the closing officers may not be skilled in closing franchise loans. If roadblocks occur, do not panic. If the bank sincerely wants to make the loan, these issues will be resolved. The key is to get the funding done, get the money in your account, and continue with your growth plans.
In summary, local and regional banks can be great sources of funding. The key is prospecting, education, presentation, and salesmanship. If the process is well thought out, your chance of success is very good. Happy prospecting!
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