Franchises and Financing

A recent article in the San Diego Union-Tribune touched on the situation of franchise businesses that have good credit but are still unable to get loans due in part to issues with the franchising company. Now, I cant comment on any one franchise and why it does or does not present acceptable risks to the borrower, bank or SBA. Some franchises are just not good businesses, and that is noted on SBA sites as well as forums and even within the  banking industry. But this is not the real gist of the article - whether a franchisor is or is not worthy of the loan due to their rate of success or failure or the level and degree of client complaints

When the Feds say 'don't make too many bad loans,' the lenders tend to hear 'don't make loans!'

What we are dealing with is the systemic lending problems that extend from the largest banks and franchisors to the smallest lenders. And those small lenders are even more afflicted by the current credit crunch that I have discussed in past essays, due to the heavy hand of federal regulations that dictate ultra-careful lending criteria. When the Feds say 'don't make too many bad loans,' the lenders tend to hear 'don't make loans!'

On top of this, new regulations that pit the borrower's financing needs against the bank's natural desire to make loans are creating the stories in the accompanying article. As I have said hundreds of times, this rough patch was not the fault of the business borrowers. The responsibility lies with the banks and financial institutions who screwed up royally and now are under the gun to tighten and restrain their credit facilities.

Unfortunately, what is already a common factor in small business, the early and frequent failure of the startups, is combined with the very rough and weak economy and coupled with a U6 statistical unemployment of nearly 18% (which includes unemployed, part-time workers looking for full time, and those no longer looking). The resulting statistics make small businesses look even less attractive to lenders.

The budding entrepreneur, with his or her capital and experience in place, is facing the continuing problem of banks’ reluctance to make loans. This environment of real and apparent risk is not going to abate soon, due to the many factors that are conspiring to thwart the business owner's attempt to get a loan. Banks just don't like making loans to small businesses today due to the regulatory environment and the bad economy. However, there are a few things the borrower can do to help himself:

1. Prepare a first-rate loan application with all the components a bank needs 
2. Talk to the SBA and SCORE to make sure the SBA is willing to back a bank loan for this business
3. Talk to numerous franchisees and the franchisor to be certain that ALL loan sources are engaged.
4. Seek professional assistance and advice to cover all bases.

The simple fact is that some loans will not be approved in this environment or economy. There are business models with much higher degrees of failure, and some people are just not suited to jumping into business at this time. It can be extremely difficult to make a go of the business. So if you are certain you want to do this - start a business and borrow a lot of money to get it going - make sure you have funding before you spend ANY money that can't be recovered. Know you can get off the ground before you buy any equipment or sign any contracts, like those for leased space, that can't be cancelled if funding can't be obtained. Get your total outlay of money in line, including investment capital and loans, before you jump into the void.

I wish you all the success in the world. I know the effort is worth it when you succeed. If I can be of help contact me. I have spent the past 30+ years working with small businesses and lenders of all sizes, and I can answer most of the questions you have and many you haven’t thought of yet.

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722.

 

Comments

[church financing]

I could not agree more with you statement that lenders hear "don't make loans"