Financing Your Franchise

Franchising's prosperity is remarkable. It has flourished in spite of, not because of, traditional lenders. Twenty years ago, if a franchisor wanted to sell a franchise, the franchisor's banker often provided the funds. This allowed the franchisor to make the sale and grow the system. The franchising industry is indebted to these pioneers who accepted much of the risk of building the franchising concept from the ground up. 

Until recently, the local bank hasn't been the place for a prospective franchisee to look for money. That is slowly changing. Banks traditionally loan on assets. That clashes with one of the strengths of franchising, since they are typically low asset enterprises. The bank wants assets, the franchisee figures he's better off not having to buy them. Consequently, the franchisee doesn't have assets to collateralize, and the bank loses interest. It's a vicious circle. 

The situation is improving for many good reasons. First, bankers are increasingly aware the failure rate of franchised businesses is significantly lower than non-franchised ones. Second, banking is shifting toward cash flow lending, a strong area of most franchised businesses. And third, franchising is attracting better educated, more experienced people. Such changes are accelerated by many positive banking relationships built over the years by successful, pioneering franchise operators. These operators have provided bankers insight into the wealth-creating potential of franchised businesses. 

Bankers are developing larger appetites for franchise financing. Some of the larger lenders are even creating new departments to serve franchise customers. Therefore, your local banker may now be more inclined to talk seriously with you.