Everything You Need To Know About Franchise Loans
Franchise Funding Options
There are a wide range of funding options available to prospective franchisees looking to open a new location, and existing franchise partners who are undertaking refurbishment or equipment upgrades. Broadly, these funding options can be categorized as either debt or equity finance.
Equity finance describes a situation in where funds are exchanged for a share of ownership in the franchise business. This can be owner’s equity (the money put forward by the franchisee) or funds from equity partners. Equity partners may be entrepreneurs looking for an investment, family and friends, or even multiple people in the form of crowdsourcing.
Debt finance describes funds that come from an outside source and are intended to be paid back over time with interest. Traditionally this comes from financiers such as banks and alternative lenders but can also come from family and friends.
Often franchisees will end up utilizing a balance of both debt and equity finance, putting forward a sum of their own funds whilst also obtaining funds from a financier. Whilst banks are often the first thing that comes to mind when thinking about debt finance, there are also a wealth of alternative lenders that offer specialized funding solutions for small businesses.
If you are hoping to use debt finance to fund your franchise business, it is important to explore your options and find a lender who offers funding that fits your unique circumstances, as debt finance is not a once size fits all solution.
Barriers to Accessing Finance
There are a range of potential barriers that franchisees may face in accessing debt finance. Small businesses often have varied and unique needs, that are not always met by the funding options offered by traditional lenders. Non-bank lenders have strived to bridge this gap by offering more flexible terms that can cater to the diverse circumstances of franchisees, often willing to take on more risk than traditional lenders. This is backed by data from Medici which found that alternative lenders have an approval rate of 55-60%, which is double that of banks, indicating that non-traditional providers are stepping in where the big banks won’t.
Further, the complex application process and collateral requirements of traditional lenders can act as a barrier. A tumultuous property market means that many Australian’s are left with less equity to source when trying to secure finance, resulting in a spike in demand for finance options which do not take property as security. In fat, 91% of those surveyed in a recent SME Growth Index said they would compromise and take a higher rate to avoid risking their home as collateral.
Property-based security can be deeply unfavorable for small business owners, meaning that demand for asset-based security solutions is high among this sector. Thankfully, smaller non-bank lenders are working to fill this demand by offering more solutions along these lines in order to capitalize on the strong growth projections among the sector.
The Application Process
The application process for franchise loans can vary depending on what type of finance product you are accessing, and who you are applying through. Each lender has their own unique application process, however there are some standard requirements that all lenders will likely be looking for. In order to be application ready you should compile key information such as a valid form of ID (License, Passport or Medicare), a business plan, Asset & Liabilities Statement, Commitment Schedule and Financial Projections.
To put your best foot forward to is best to spend the time gathering all this information and ensuring that it is up to date and accurate. Not only will this shorten the application processing time by cutting down back and forth, but shows credibility and responsibility on behalf of the applicant.
Also, some franchise applicants may think that because they are part of an existing franchise network, they don’t need to present an in-depth business plan. Whilst the lender may be familiar with the franchise model, they still want to see a comprehensive plan of how you are going to approach your business and the aspects unique to your location and circumstances.
What Lenders Look For
When it comes to assessing franchise loans, lenders often following the principles outlined in the 5 C’s of Credit. These principles act as a guide to assess the borrower and their ability to service the loan. The first, Character, is an assessment of the borrower themselves and includes aspects such as reputation, credit reports, social media and online presence, and overall willingness to pay the debt. Capacity focuses on the financial ability of the borrower to repay the loan amount and examines income, expenses, and existing financial commitments. Capital is a consideration of the borrowers overall financial position including available assets and their liquidity. Collateral considers what security is available to talk alongside the loan – this may also come in the form of Director’s Guarantees or Personal Guarantees. Finally, Conditions encompass the terms of the financial contract such as interest rate, fees, term, and end of term options.
In addition to this assessment of the borrower and their business, lenders may also take into consideration current market conditions and industry trends. If there is a booming industry finance providers may have more appetite in this area, or if a sector is performing poorly this may also be taken into consideration.
Within the franchise industry, lender accreditation programs play an important role in providing potential and existing franchise partners with streamlined access to finance. Accreditation programs assess the franchise network as a whole and based upon that assessment offer franchisees a pre-approved amount of finance with that lender. Under the accreditation applications are generally low-doc and may be assessed under a different credit matrix to make the entire process easier for the franchisee.
Both traditional lenders and non-bank lenders offer accreditation programs, however there are some distinctions between the two. Often banks are only willing to accredit larger national networks with over 50 locations, however alternative lenders can be more flexible in extending the program to smaller, less-established networks. Franchise networks can secure accreditation with multiple lenders in order to provide more options to those within their networks, making it a valuable asset in their recruitment and retention toolkit.