The landscape of franchise financing is shifting. New lenders are entering the market, and the characteristics of the average franchisee are changing. The Small Business Administration (SBA) continues to make changes, and the Federal Reserve has been responding to a unique economy.
The diversity of sectors and brands in franchising is vast, as is the type of franchisee borrower. Lenders have different relationships with single-unit, 2–10-unit, and 10–plus-unit borrowers. Emerging brands, defined as having fewer than 50 franchised units and fewer than five years in franchising, don’t have enough performance data available to help the lender feel comfortable underwriting loans but offer new opportunities for lenders to develop long-term partners as they grow. On the other hand, mature brands generally have historical performance data available but are more likely to have established relationships.
The SBA-guaranteed loans remain an essential financing source as they offer reasonable interest rates, extended repayment terms, and the ability to minimize injection while maximizing the loan amount to cover the bulk of the cost.
However, the SBA Franchise Directory was taken down in May 2023, and new standing operating procedures were released in August 2023. The SBA intended to require the lenders to judge the eligibility of any franchise loan, but many of the lenders were not prepared to make these decisions.
The lenders’ responses have varied. Some are asking franchisors to provide assurances for every loan. Some have added new fees for the borrower to cover the charges necessary for their lawyers to conduct reviews. Worst yet, some have simply decided to make fewer loans, especially to new brands with whom they have no history.
Certification
One solution for this problem that is making a difference is the Franchise Registry Eligibility Certification. Created in consultation with some of the largest lenders in the industry, the certificate is a statement made by the franchisor that their franchise agreement meets the requirements of SBA lending. By signing the certificate, the franchisor assures the lender that loans made to their franchisees are eligible for the SBA guarantee. Importantly, completed certificates are hosted on FRANdata’s website for franchise lenders, the Franchise Registry (www,franchiseregistry.com.)
All the major franchise lenders (more than 9,000 now and counting) use the Franchise Registry to access information about each brand they are lending to. Additionally, some of the largest franchise lenders now require FRANdata’s Franchisor Registry Eligibility Certification to process their loans.
FUND score
Lenders are requiring more information from borrowers and franchisors. Borrowers will need to provide historical financial statements, cash flow statements, balance sheets, and personal guarantees. Franchisors must provide franchise disclosure documents, and the FDDs should include item 19 performance statements. Some of the largest franchise lenders now rely on the FUND score to provide a benchmark that determines current and future success. Franchisors, with their FUND score and/or bank credit report available, demonstrate to lenders a brand’s readiness to support their franchisees in getting financing.
We recently awarded the FUND TopScore Award at the Multi-Unit Franchising Conference—spotlighting the brands with the highest FUND score at the event. The TopScore FUND award was created to highlight those brands that have risen above their peers by simplifying the financing process, which means a lower cost of capital and better financing terms for franchisees.
As the landscape of franchise financing continues to evolve, it’s clear that adaptation is critical for both lenders and franchise brands. With the vast diversity across sectors and brand types, lenders are navigating varied relationships with different kinds of franchisee borrowers. Emerging brands present opportunities for long-term partnerships, albeit with less historical performance data, while mature brands offer stability but often come with established relationships.
Despite the importance of SBA-guaranteed loans, recent changes in SBA regulations have added complexity to the lending process, prompting lenders to seek assurances and additional fees from franchisors and borrowers alike. The Franchise Registry Eligibility Certification provides lenders with confidence in SBA eligibility. It’s hosted on FRANdata’s Franchise Registry and streamlines the lending process for both parties.
With lenders now requiring extensive financial information and franchisors providing comprehensive disclosure documents, collaboration and transparency are becoming paramount in navigating the evolving landscape of franchise financing.
*This article originally appeared in Multi-Unit Franchisee Magazine Issue 2 of 2024. You can view it here.