Most people are familiar with the process of getting a home or car loan. But for franchisees hoping to finance their first restaurant, fifth location, or even a remodeling project, securing a loan is a totally different ball game, one that can be difficult to navigate.
That’s especially true in today’s economic climate, as traditional lending sources remain careful with the new loans they issue and innovative financing opportunities become available for small business owners. The new financing reality is leaving quick-serve franchisees to figure out how to fund their expansion, something more operators are investing in as the economy slowly finds a foothold.
Many brands are directing their franchisees to BoeFly, a virtual marketplace of commercial and business lenders that helps franchisees find lending institutions. Firehouse Subs, for example, provides potential franchisees with access to the BoeFly portal.
“We already have the brand entered, and franchisees just have to put in their personal financial information, which is available for review by 1,500 banks,” says Greg Delks, vice president of franchise development for Firehouse Subs. “A small local bank in Indiana may be willing to lend money to a franchisee across the country, which the franchisee would never have been aware of the bank otherwise.” Firehouse Subs also has its own franchisee lending company, Cap 94, which has lent $11 million to date to existing franchisees for expansion.
For new franchisees who have been in the workforce for many years, a popular financing option is the Self-Directed 401(k), Delks says. The franchisees take money from their 401(k) and form a corporation, which lends the money to the franchisee and becomes an equity partner in the business.
“Let’s say that someone borrows $100,000 from their 401(k). Even after their loan to the 401(k) is paid back, a percentage of their earnings continue to fund their 401(k),” Delks says. “These folks are investing in themselves instead of Wall Street.”
Dave Bagley, principal for the MorrisAnderson Franchise Practice Group, says franchisees should consider alternative financing routes. One option, he says, is leaseback financing, in which a franchisee sells the restaurant’s real estate to an investor and pays the investor rent on the property in exchange for a loan. One of his clients obtained $10 million in financing by paying $1 million annually for 19 locations.
Another possibility is credit card financing, Bagley says, which can be a lot more expensive than other loans.
“Instead of all credit card revenue going to the franchise, a portion of the receipts go directly to the financing company,” Bagley says. “The loans have a very high interest rate, up to 30 percent, and are often for six to 12 months.” He also recommends franchisees investigate Small Business Administration loans, which generally are for up to $400,000 for a 90-day period. Veterans also have access to a variety of lending programs for starting businesses under the Patriot Express program.
Brian Frank, senior vice president and head of the Restaurant and Franchise Group at TD Bank, says franchisees should have a solid understanding of their financial situation and clarity about their lending needs over the next 12–36 months before meeting with potential lenders.
“Some financing options designed just for one store will limit the franchisee going forward, while others are best for a franchisee who plans to open more locations in the next few years,” Frank says.
Since financing issues can slow down a brand’s expansion, many brands are working directly with franchisees today to help make the financing process easier. Bagley says he has seen more brands providing this type of assistance to franchisees. “A lot of brands have gotten pre-approval packages set up through financial lending institutions for their franchisees,” he says.
He adds that brands are increasingly providing administrative assistance to franchisees to help create their approval presentations for the bank. “The bank wants professional quality presentations and financial forecasts,” he says. “Brands who help their franchisees create these products are in turn increasing the number of franchisees who are able to successfully finance their restaurant.”
Rod Arreola, CEO and cofounder of Teriyaki Madness, says his brand has relationships with financing companies and banks that work with franchisees to help find the best option for their situation.
“We are also on the Franchisee Registry and have a credit report with FranData, which makes it easier for franchisees to get SBA loans,” Arreola says. “If a franchisee wants to work with their local bank, we also provide business-plan templates to help increase their chances of being approved for a loan.”
Despite the bevy of alternative financing options, many experts say banks and specialized lending institutions should still be the first stop when looking for financing.
“There are different routes franchisees can take, including going to their local bank, non-banking lenders, and junior debt lenders,” Frank says. He says one of the benefits of going to a bank is that owners can simplify their finances by using the same bank for their business accounts. “If you have a cash-based business, you need to have a banking relationship with a full-service bank. By using one institution for both, it makes franchisees’ lives easier.”
But it isn’t enough to just walk in and ask for a loan, even for the most well known franchises, Arreola says.
“Lenders are really looking for solid concepts with great economics,” he says. “When you meet with a lender, you need to prove that your franchise opportunity is a viable concept that will make you a profit, which will allow you to pay back your financing.” He adds that most lenders require collateral, typically 20–25 percent of the loan. “It can be in the form of cash or other assets, such as a house or property.”
Since the recession, many banks have become more stringent in their lending guidelines, especially for first-time franchisees, Bagley says. “A lot of the banks had to severely change their loan programs to be more conservative, and change their focus to larger brands,” he says. But the good news is that he now sees the franchisee lending business picking back up, especially with regional institutions.
“Bigger banks are also starting to wade back into franchise lending,” Bagley says. “I am hopeful for 2014 and that the economy stays where it is to continue to allow funding for franchisees.”
A previous version of this article incorrectly cited Brian Frank's name as Brian Rusk. QSR regrets the error.