September 15, 1997Bankers prefer familiar faces in franchises
Kathy Hoke Business First
Starting or expanding a franchise requires money -- your own or somebody else's.
When that somebody else is a bank, come prepared.
Bankers say they look at the same fundamental issues with franchises as they do with any other business seeking a loan.
"It all revolves around the business plan," said Roger T. Davidson, vice president of Bank One's small business unit in Central Ohio. "You have to have a good one, especially if your concept is new to the market."
The business plan should include a description of the experience of the management team, the product or service and its position in the market, cash flow and balance sheet.
"You look at that with any loan," said Douglas V. Wyatt, senior vice president for commercial banking at Star Bank in Central Ohio.
"The fundamental concerns are going to be the same," Wyatt said.
But bankers also will examine some factors unique to franchises. One is the franchise fee. "The business owner and the banker will consider whether it is money well spent," Wyatt said.
The fee often covers national advertising and general assistance in setting up and running the franchise. Many franchisers will issue an accounting system that guides the franchisee in running the business.
When the fee pays for the right to use a concept but offers little else, a franchisee needs to include more information in the business plan, such as a local marketing strategy, bankers said.
Hooking up with a large franchiser with a successful track record will help a franchisee's loan application.
"All the big franchisers have a thorough process to pick their franchisees," Wyatt said. "They've done the pre-screening, because they have an interest that the franchisee succeeds."
Along with the business plan, bankers will look at the franchise agreement and the history of the franchiser.
"We've done a number of franchise companies in Columbus," Davidson said. "Overall, we've had good experience."
Historically, franchises have performed better than other types of business, said Laura Douds Frum, program manager for Small Business Administration lending at Huntington National Bank.
Frum said she has seen a dramatic increase in the number of loan applications from new franchise operations. Lenders study these applications more thoroughly because the concepts lack a track record.
The Small Business Administration, which underwrites many franchise loans, is planning to create a centralized registry of franchisers. Frum said that and other initiatives from the SBA will help commercial lenders evaluate risk from newer franchise concepts.
Frum said some franchises are too easy to get, requiring only payment of a fee. She sees far too many one-page loan applications from those whose franchisers have required only a royalty.
Frum said her unit sends back many applications because they are incomplete.
"You need to do due diligence," she said. "We need to know that the borrower has at least gone through the exercise of thinking through what the business will do, because that gives us an indication that they're really serious about it."