Multi-Unit Franchisee Magazine Issue III, 2011 | Page 52

By Eddy Goldberg

Capital Ideas
Bridging the lender-borrower gap

A

ccess to capital has been a bane to franchise growth
for nearly three years. Much of the blame has been placed
on lenders, who have been notoriously gun-shy since
the September 2008 financial debacle. Stricter underwriting
policies, the result of increased regulatory oversight, bankers
say, is to blame. Of course, that’s not the whole story. Other
obstacles are involved, many of which
can be eliminated by franchisees—but
not without help from their franchisors.
That’s one of the major takeaways
from the IFA Small Business Lending
Summit in April, which brought together
about 200 bankers/lenders, franchisees/
franchisors, and government regulators/
officials seeking to improve the lending
environment for franchisees.
Randy Schultz
While it shouldn’t come as news to
any savvy franchisee seeking capital, bankers at the event repeatedly spoke about a communication gap between the lending
community and the applicants who approach them. Bankers
said they want to lend and have capital available. Franchisees
said, “There’s no money out there.” Now there’s a gap. We followed up with several of the panelists to ask them what multiunit franchisees should know before approaching a lender.
“I think the most successful franchise systems are those that
regularly engage with the financial community to ascertain
what they are looking for in providing capital to their systems,”
says Randy Schultz, managing director of the restaurant group
at Regions Financial. For example, he
says, Taco Bell or Wendy’s will routinely
reach out to capital providers and lenders with updates on how the system is
performing—and, he adds, they also try
to understand the universe of financial
providers that support their systems.
He encourages franchisors “to proactively advise their franchisees on how
to best approach the financial commuMark Edwards
nity.” (One vehicle is the FAC.) The
better brands, he says, do this. “It’s in the franchisor’s best
interest,” says Schultz. “That’s why they’re getting a royalty
of 4 to 6 percent.”
For Ron Feldman, CEO of Franchise America Finance

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Multi-Unit Franchisee Is s ue III, 2011

(FAF), one big takeaway from the event is that “Franchisors
have to communicate better. Have resources in your organization to help franchisees get credit. Franchisors used to say
‘Go get your own money.’ That dog doesn’t hunt any more.”
Mark Edwards, senior vice president and senior loan administrator for BB&T, commercial credit administration, says,
“When we talk to a franchisor about our bank working with
them and their franchisees, we talk primarily about what their
expansion plans are, what their concept is, and what process
they follow to choose franchisees. This will tell us a lot about
what they’re looking for.”
First, says Edwards, “We want to have a relationship with
franchisors—a clear relationship, not direct or depository, necessarily—and how it affects the individual franchisee in their
particular concept. Second, he says, “The franchisee is our direct
borrower and direct relationship. Our approach at BB&T is to
have a local community bank relationship with each borrower.”
Think inside the box

Bankers and lenders want to make loans
and to feel comfortable about the risk
involved, says Schultz. That comfort
level requires confidence in the franchisee, the brand, and in being able to
defend their loan portfolio in today’s
harsh light of regulatory oversight. For
that, they need data.
Ron Feldman
“What’s missing in a lot of situations
is not understanding what the bank’s box is and what data is
available,” says Schultz. Good data, he says, is a predictor of
probable success or failure.
Banks today, says Edwards, will look at the track record
franchisees have with their current locations. “This will essentially entail a review of their performance from a revenue
standpoint, but particularly from a cash flow point of view—
and their ability to take on additional debt.” For example, if
requesting capital for a piece of equipment to enhance or
upgrade a current location, will it be additive to revenues
and increase cash flow?
Franchisors, for their part, he says, should be as open as possible with lenders about their plans, realistic about expansion
(where, how fast), the direction of their business, and about
introducing new concepts that may require a franchisee to add