Beyond PPP: New Considerations In Lending

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.

The Pendulum Swings – again

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?  

The Next Steps

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 do your state’s COVID-19 regulations affect your business opening (e.g. Texas is allowing hair salons to open as of May 6)?
  • How do you plan to have a successful business opening and be fully operational (ex: successful presales, heavy marketing, etc.)?
  • What steps will you and your business take to cope with COVID-19 (e.g. temperatures screening, capacity-limiting solutions, sanitation plans, etc.)?
  • How will your business operate (e.g. changes to the business model, expected revenue, etc. due to COVID-19)?

Appropriate Responses

How does the franchise candidate manage these responses?

  •  If any of these are negative changes, does the candidate have any solutions to help remedy their impact?
  • If there are any positive effects/outcomes of the COVID-19 environment, be sure to include them and explain (e.g. because hair salons have been closed for weeks, sales are (or should be) very successful because people are long overdue for a haircut, style or color treatment).
  • List everything else you think makes a strong argument about why this loan should be funded to help the business should open soon.
  • If this loan is for an existing franchisee who received rent relief or royalty relief, explain that and the terms of paying it back.
  • Do what you can to put a positive spin on the explanations, about how the business will be successful amidst any current or future COVID concerns.

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.

For more information contact Shay Mora at For assistance with updating your manuals, contact Mary Ann O’Connell at

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