Navigating the current credit markets: franchisors need to become bank friendly.

Author:Feldman, Ronald A.

The credit markets change on almost a daily basis. Loans are available, but there is fierce competition for the funds that are available. That said, this article is written to help readers navigate the choppy waters that most know as the credit markets. Material has been broken down into each subsection in franchising to allow franchise representatives to fit the information into their individual brand paradigm. Before getting to the nuts and bolts, let's take a look at things from 30,000 feet.

  1. Washington will not solve this problem for us. However, the franchise industry must put continuous pressure on its legislators and the president to foster franchise and small-business friendly legislation. IFA and its political action committee, FranPAC, do a great job of speaking for the industry, but the entire community must put pressure on its individual legislators on a continuous basis so that it is "the squeaky wheel."

  2. All banks are not evil. Banks simply want to be repaid when they lend money. If their risk of not being repaid is outside their risk tolerance, they will say no. The FDIC and OIG have put additional pressure on banks through egregious auditing procedures and have them afraid to lend money. Recent legislation (known as Dodd-Frank) will only make that regulatory pressure worse.

  3. Regulators are cracking down on prior "loose lending" policies of some banks. This has created a high level of awareness on loan packages presented by borrowers. The most recent ruling came down when projections submitted for a franchise start up were outside of the Item 19 disclosure from the franchise disclosure document. This caused the U.S. Small Business Administration guarantee to be impaired to the lender, and put a black mark on franchise lending.

  4. The SBA loan program and its higher limits have not been embraced by some borrowers. Many multi-unit franchisees are unwilling to agree to the SBA requirements that all personal collateral be pledged, and have elected to wait it out rather than moving forward with SBA borrowing, which is available for them.

Now, let's look at the nuts and bolts, and how to address the markets for each subsection of franchising.

For Franchisors

First, make sure your system is ripe for growth by asking one simple question: As a rule, are current franchisees profitable? If they are not (or this is unknown) then stop reading this article and fix your franchise system.

If your system calls for an investment level of...

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