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Frank Gallagher is the Senior Vice President, Specialty Financing at United Community Bank, a national lender in the franchise industry. With more than 28 years of lending experience ranging from franchise start up to large multi-national companies, Frank is considered one of the “best in the SBA market” by his peers and is continually involved within the franchising industry network.
Frank answered some questions for us on the state of the franchise lending environment and how prospective franchisees can better prepare themselves to apply for credit.
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What is the general lending landscape for franchisees?
Many lenders have expanded their franchise lending operations and other new lenders have decided to enter the franchise lending arena. Overall, the news is good with regard to availability, however there is a downside. Choosing a lender is similar to choosing your franchise partner. Experience, process, reputation, and relationship should be part of your decision-making process.
How does franchise lending differ from regular small business lending?
One of the most significant ways that franchise lending differs than regular small business lending is the concept that although you are a small business owner, you are part of a larger entity. This is significant in three ways.
Firstly, you have the benefit of joining an existing brand identity that could potentially generate business before you even put your own spin on things. You are joining an established company that potential customers may already trust or be aware of. This impacts your loan discussion because lenders typically consider more established franchises as sounder investments.
Finally, you’ll need to consider overall compatibility with the established brand. This is not the case when you create a new business. With a franchise, you’ll need to make sure your values, goals and vision align with the franchisor before you enter into a long-term relationship.
What are the most popular loan programs for franchisees?
SBA loans: a U.S. Small Business Administration (SBA) loan usually boasts lower interest rates and smaller down payments than many other loan products. An SBA loan helps lenders who invest in small businesses by guaranteeing a percentage of the loan.
SBA 7a loan: the most attractive characteristic of the SBA 7a loan is its flexibility. With a borrowing range of $50,000 to $5 million, funds from this loan may be used for purchasing the franchise and real estate, construction costs, equipment expenses, hiring, marketing, day-to-day operations, refinancing debt, and more.
Conventional lending: this is a traditional business loan. The specifics of the loan, including interest rates, terms, and payment structures, are varied based on the lending institution. Generally speaking, conventional loan options are available to established operators only.
Micro-lending: for a smaller enterprise or one-time business need of up to $50,000, microloans may be a suitable avenue to explore. And explore you will—since micro-lending doesn’t require as many hoops to jump through to qualify, it isn’t as common among standard lending institutions, and interest rates may range from low to well above average for small business loans.
What do prospective franchisees need to prepare in order to apply?
You want to understand and organize your personal and business financial information early in this process. Have copies of business and personal tax returns, financial statements, bank statements, loan statements and other pertinent information at hand. Most lenders include a checklist of required information with their application package.
Obtain a copy of your credit report. Review the report for accuracy and address any incorrect information it may contain. Be prepared to discuss any irregularities with your lender. Don’t worry, “life happens” and most lenders will make some allowances for those life events that tend to affect your credit score.
Finally, you’ll also need to determine exactly how much money you will need. You’ll need to take into account franchise fees, equipment costs, training costs, deposits, build out costs, legal and accounting fees, operating capital, etc. Many of these items will be in the franchise disclosure document.
Can you discuss the importance of a business plan for lending, even for prospective franchisees?
Lenders use a business plan as the basis for their understanding of your project. The business plan not only informs the lender of the project details, it also reflects the borrower’s understanding of the project being pursued.
You will be sharing this plan with lenders, which means you want to be as thorough as possible. In your business plan, be sure to include your pro-forma projections, financial assumptions, financing needs, management and personnel structure, marketing strategies, location information, and industry and competitive landscape. Be ready to talk about these topics with confidence and specificity.