Adapting the approaches of successful internet sites to help franchisees connect with lenders

Michael Rozman is president and chief strategy officer of Boefly, LLC. He can be reached at 212-561-5959 or mrozman@boefly.com.

Michael Rozman - Adapting the approaches of successful internet sites to help franchisees connect with lendersWhile media reports suggested that the nation’s economic skies were brightening this summer before the debt ceiling debate and the nation’s credit rating downgrade, access to capital remains a challenge for many current and prospective franchisees, and therefore franchise system operators. An estimate by FRANdata, disclosed during the April 2011 International Franchise Association’s Small Business Lending Summit, forecast that only about 80 percent of the loan demand projected by franchisors will be able to be met by banks, resulting in a $2 billion shortfall in 2011 franchise lending. The resulting competition among franchisees for lender attention will amplify the inefficiencies and instability already present in the small-business lending system. It will also cause thousands of lost opportunities for franchisors and franchisees alike, unless aggressive action is taken.

This situation is driving many franchisors to become more proactively involved in the franchise financing process, as they have experienced firsthand the consequences of relinquishing control of their system growth to an unstable small-business credit market.

“If they can’t get the money, I don’t get to award a franchise–which means I’ve got a problem,” said Scott Haner, CFE, director of franchisee recruiting at Yum Brands’ KFC franchise system, at a recent industry event. “So if there’s something I can do to help, then I want to understand what it is.”

Hands-on Financing

Indeed, many bankers are encouraging the transition. “It’s no longer a hands-off approach to financing,” according to SunTrust Bank Franchise Business Development Officer Keith Pillow, “Over the years, it’s gone away from franchisors saying: ‘now that we’ve got you signed up, try to go get financing.’ I think franchisors are realizing that they have to have a hands-on approach to financing.”

This shift away from passive involvement in the financing process is taking many forms, including developing lender information packages to educating banks about their franchise concept, informing franchisees how to create a bank-ready financing package, and in a few cases, offering in-house financing directly to franchisees.

Actively enabling prospective and current franchisees to connect with multiple lenders to increase their probability of obtaining a loan is another form of support now being offered by franchisors. Through Internet marketplaces, small-business borrowers are connecting with small-business lenders, greatly increasing the efficiency of the small-business lending process by adapting the technologies and approaches that have revolutionized everything from dating, job search, hotel bookings and numerous other aspects of our daily lives. By providing a service where franchisees seeking financing can be matched against the preferences of hundreds of banks with money to lend, online marketplaces are benefiting borrowers, franchisors, and lenders in the same ways that such services as match.com, monster.com and expedia.com have benefitted singles, job seekers, employers, travelers and hospitality providers.

Making the Franchisee-Lender Connection

The main participants in online franchise finance marketplaces are lenders and franchisees. Lenders register their lending preferences and franchisees submit their financing request packages electronically with a marketplace provider, which in turn uses compatibility matching technology conceptually similar to those services mentioned above. When the system makes compatibility matches among member lenders, it e-mails the matching lenders the summary deal information.

Lenders can then request the franchisee to allow access to its full loan package which is securely stored and typically provides all of the information a lender needs to underwrite a loan. With this information exchanged and the parties connected, the most challenging parts of the lending process have been streamlined, shortening the interval between being ready to talk to a lender and actually talking with one.

Online marketplaces for franchise finance attack inefficiencies across the entire small- business lending landscape. For franchisees seeking financing, they can significantly increase the number of potential lenders that can evaluate their loan request. Those lenders are also more likely to be from more diverse locations than just the borrower’s local area, reducing the challenges faced by qualified borrowers in rural or economically depressed areas where the credit crisis may be more severe.

Absent an online marketplace, franchisees have the burden of physically travelling to multiple banks and filling out multiple loan applications just to have their loan request considered by multiple banks. Worse yet, the franchisee will typically have no sense of how well his loan request aligns with the lender’s current lending preferences, making a high percentage of these visits completely unproductive. The inefficiency of the process undoubtedly has a chilling effect on many franchisees’ appetite to engage with multiple lenders, which ultimately delays or otherwise impairs their ability to obtain some or all of the financing they seek.

For lenders, online marketplaces increase the number of potential deals they see each month, and those interested in lending outside of their home region obtain access to qualified loan demand nationwide (or in as many states as they register in their lending profile). Equally important, opportunities originating through exchanges are pre-screened for compatibility, therefore greatly reducing the time and expense associated with reviewing loan packages unlikely to result in a loan transaction.

For franchisors, making their franchisees aware of franchise financing marketplaces is an easy way to connect their franchisees with sources of financing without the complexity, risk and expense of providing in-house financing. Online marketplaces also provide services that help franchisees with assembling a complete and compelling loan request package, as well as help inform and promote their franchise concepts to a broader footprint of lenders.

“Online platforms are an interesting alternative to doing either road shows around the country or other things that help get our concept and our folks in front of as many lenders as possible,” said Scott Perry, vice president of finance for SportClips.

Increasing the Odds

The current credit crisis has amplified the systemic inefficiencies inherent in franchise finance. Prior to the crisis, even the most financially-capable franchisees found the process of seeking financing at best frustrating and at worst, a significant constraint to timely openings–delaying and depressing revenues for both franchisee and franchisor. Franchisors who are only passively engaged in franchisee finance are entrusting their growth to an unstable small-business lending system and franchisees who typically have a limited understanding of the small-business lending process and few, if any relationships in the lending community.

Franchisors who are more actively confronting the challenges wrought by the credit crisis are employing several of the following strategies to increase the odds that their franchisees obtain the loans they need to achieve a timely opening. First, they actively engage lenders with in-depth information about the health and well-being of their franchise system. They invest in getting to know a wide array of lenders and develop a solid understanding of what lenders are looking for in new candidates. Next, they use a systematic approach to qualify franchisees based on a reasonable expectation of fundability, and then help qualified franchisees better understand the lending process, including what information they need to provide to enable a lender to make a prudent lending decision. Finally, leading franchisors are taking advantage of some of the new Internet marketplaces to provide access to services that connect franchisees with multiple compatible lenders, from nationwide financial institutions to some of the thousands of community banks.

The return on investment franchisors can expect from these investments comes through system differentiation, more and faster franchise loans, and ultimately increased system revenue. Franchisors who take an active role in franchisee finance are turning a market challenge into a competitive advantage.

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