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Lending Alliances: Five Options for Franchise Funding
November 2005
 Multi-branding is hot. According to some leading franchisors, it may be the key to the future of the quick-service restaurant industry. The good news is that finding financing typically is easier the second-or third-time around.
Here are some strategies to consider:
- Sale/leasebacks. Franchisees who own business real estate can put it to work as a capital source by selling the real estate to a financing company, then leasing it back. You essentially profit from the sale but retain operating control. “If you go into default, you may lose the store but you won’t lose your house,” says Brad Saltz, director of restaurant services for Cleveland, Ohio-based SS&G Financial Services, Inc.
- Franchisors. Franchisors such as McDonald’s link franchisees to “relationship” banks offering competitive financing packages. They also may offer guarantees to make the numbers work. Among the options, says Mark Siebert, chief executive officer, The iFranchise Group, Homewood, Ill.: a financial guarantee of up to 10% of the loan portfolio; a guarantee cushioned by a take-back provision; or a guarantee that includes a remarket agreement for a given number of units.
- Partnerships.“It’s better to do it on your own. But if you can’t, look for 10 investors with $50,000 rather than one ‘angel’ investor,” advises Saltz. The key: finding partners with aligned interests and, if possible, complementary contributions such as operations skills or access to a development pipeline.
- Venture capital/funds. Generally, venture capital is interested only in large portfolios. However, Franchise-Consultation.com reports financial brokers are approaching franchisors to put together large pools of money using Small Business Administration (SBA) and private funds.
- Traditional sources. The SBA has two basic loan programs, says spokesperson Mike Stamler: a guaranteed loan that provides for a partial guarantee on bank loans up to $2 million and a certified development company loan. If you want a longer term and can pay a higher rate, Saltz advises going to a national bank. Local banks are more likely to lower the interest rate as a balance to a shorter term.
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