Franchisers becoming lenders in tough economy

Franchisers becoming lenders in tough economy

Banks are not nearly as eager to lend to would-be entrepreneurs as in years past, as many franchisees are discovering. Unless they have significant experience in the industry or a surplus of liquid capital, according to the New York Times, banks are either denying applications or imposing restrictive and expensive terms on customers.

An increasing number of franchisers are offering in-house financing to franchisees, which takes the bank out of the equation altogether. The terms are sometimes more appealing to start-up business owners who don't want to leverage their own capital in order to make their new ventures work.

Other financial services can also be found within a franchise network. For example, merchant account providers often offer tiered services to franchisers and their operators, which saves money for everyone and keeps operators from having to set up their own accounts.

And, in a way, this system is better for all involved. Operators pay interest on loans to their franchisers, which means that money can be allocated toward marketing, promotions and other expenses that directly benefit franchisees. In the case of merchant accounts, things like fees and hardware are streamlined, creating an homogenous working environment among different stores.

Finding funds
Franchisees are discovering that this economy has created new problems that can stand in the way of opening new stores. Banks assess borrowers based on risks -- What are the chances this borrower will pay the loan back? What are the chances he will fail in business? -- and they aren't willing to assume as much risk in a troubled financial market.

This means that entrepreneurs have to get creative when searching for financing. If going directly to the franchiser isn't an option, they have to learn what banks want and deliver those assets upon filling out an application.

For example, according to the New York Times, banks are more willing to give loans to franchisees if they have a working spouse or assets they can put up as collateral. These factors reduce risk and therefore make the borrower seem more appealing.

Franchisees must also consider their business plans and their potential for success. Is the business model viable? How long will it take to turn a profit? And what does the franchise headquarters do to make success more likely for their operators?

Making smart business decisions
It is never a good idea to jump into a franchise operation without thinking it through. This is especially true when it comes to securing financing because, as many homeowners will attest, the terms and conditions of a loan can make a big impact on whether or not it works out.

Look carefully at every loan application you fill out. Note the interest rate, grace period, finance charges and other terms to make sure they are reasonable.

The same goes for dealing with the franchise headquarters. If you are opening a merchant account in a tiered network with the franchise headquarters, make sure the fees and conditions align with your expectations for business. And if you borrow from the franchiser, you must still read the fine print

Published: July 26,2023