Banks regard franchise operators as good loan prospects

Many bankers say that associating with a strong franchise gives new businesses a leg up on other customers seeking loans, but lenders are still taking close looks at these borrowers before they put ink to paper.

Loans to franchise operators are inherently risky because they often don’t include real estate as collateral. These loans are often based on inventory, leasehold improvements, bank accounts, accounts receivable and, sometimes, personal guarantees. Occasionally, the franchise will guarantee a portion of the loan.

Although the losses are greater should these loans go bad, non-real estate business loans have had far fewer delinquencies than real estate loans during the recession. So, many banks are looking to boost lending in that area.

A benefit to loan seekers

Orlando Roche, Miami-Dade County regional president for Palm Beach-based Lydian Bank & Trust, said being associated with a strong franchise could benefit companies seeking loans.

“Being in a franchise versus a regular business gives you more comfort because the name is known and they have a formula,” he said. “That’s why people are willing to pay a premium for that.”

That doesn’t mean banks will overlook the borrower. Roche said a borrower should have experience in the industry, regardless of the strength of the franchise. It’s often easier to finance someone who is buying an existing franchise, so the bank can base the loan on cash flow, he noted.

“Franchise lending is in favor right now as a lot of banks are full on their commercial real estate fronts and aren’t looking to put more commercial real estate on the books,” said Raul G. Valdes-Fauli, Miami-Dade County president and CEO for Orlando-based CNLBank.

When looking at the franchise, he likes to see one with a track record of success in the local market, as opposed to a franchise coming to town for the first time. The borrowers need strong support in advertising and guidance, especially in the first couple years, he noted.

“If the parent company is really well run, then it’s easier for a bank to get its head around it,” Valdes-Fauli said. “If the parent company is lax and doesn’t offer a lot of guidance and support, it will be a lot tougher to succeed.”

Valdes-Fauli likes to see consistent quality throughout franchise locations and a model budget set by the franchise that is realistic for the borrower.

Some franchise loan can be backed by the U.S. Small Business Administration’s 7(a) program. To make the loan application process faster and easier, franchises can have their franchising agreements reviewed for SBA eligibility in advance, said Nancy Rackear, spokeswoman for the SBA’s South Florida district office. This ensures that the agreement wouldn’t give the franchise so much financial control over the franchisee that it would no longer be considered a small business loan.

Partnering with FRANdata, the SBA lists pre-approved franchises on www.franchiseregistry.com. It takes eight to 10 weeks for the review to come back, and costs $2,500 a year to be on the list, Rackear said.

The SBA can approve loans based on franchise agreements not on the list, but it takes longer to process, she noted.

South Florida Business Journal - by Brian Bandell bbandell@bizjournals.com | (954) 949-7515