Those of you who have been in franchising for a while probably remember the recession and its effects. Suddenly, banks were under scrutiny, risk tolerance dropped to zero and they were burdened with new regulations and fail safes. Loans that had previously flowed to brands were suddenly held up. The banks wanted the franchisors to prove they had “skin in the game.”
The onus to prove viability shifted from the franchisee (borrower) to the franchisor. Item 19 came into full bloom as brands were trying to prove their worth. The smarter franchisors were quick to adapt and complete the requirements for the Bank Credit Report and the Franchise Registry and changed some of their FDDs to show that they were more willing to back the franchisee with royalty payments that ramped up and other investments. Their financial statements became more detailed. This really wasn’t negotiable: If you wanted franchisees funded quickly for a fast ramp up, you changed.
Now, as it always happens in nature, the pendulum is swinging back to the franchisee. First, as always happens in a weak jobs market, the interest in franchises is increasing. Across the board, brands are talking about a surge in franchise applications, discovery days and licenses. People want to feel more control over their lives and are investing in themselves. Meanwhile, the banks are writing loans. Even with SBA backing and a lot of government requirements, the banks have written more loans in a matter of weeks then they do in a year through PPP and EIDL programs. And now your prospective franchisees want and need money to open your latest unit. This time, the onus is on them to prove their worthiness. What will your franchisee be able to do to open and flourish in these uncertain economic times?
As reported by Sherri Seiber, COO and Shay Mora VP of Lending at FranFund, some SBA lenders have started to ask borrowers to sign an “Adverse Change Certification” or “Adverse Change Questionnaire”. The documents vary by lender. For samples from US Bank, contact Shay Mora. Ms. Mora said these are some of the common questions now being posed to franchisees:
How does the franchise candidate manage these responses?
Franchisors, though the banks aren’t scrutinizing you directly, it’s to your advantage to help the franchisees and candidates to communicate the brand’s strategies and tactics, newly enacted brand standards and business plans. Cite things such as improved supply chain stability, price adjustments, and , marketing campaigns. Be certain that all permanent changes are incorporated into your manuals and training immediately and featured in the tables of contents and training matrices in the FDD. Consider creating a branded one-sheet created by your marketing department (and reviewed by counsel) that the franchisee can include in the loan application package. FranFund recommends to their franchisee and franchise candidate clients to consult with their franchisors about the contents of the loan package since most have detailed plans in place. Then have the candidate send the information to them for review before submitting it to the bank. Check that your funding company offers that service.
Pendulums have a way of swinging back and forth: It will come back to the franchisor for scrutiny at some point. By helping your franchisees now, you can be better prepared when it does while you build strength back into your system now.