Multi-Unit Franchisee Magazine Issue IV, 2012 | Page 82

FranchiseMarketUpdate
By Darrell Johnson

The New and Improved Normal
New tools boost franchise lending prospects

W

e’re now in phase two of
a small-business credit recovery that started in late
2011 and will last a few more
years. This phase is defined by the banking
community’s gradual return to small-business
lending, the result of banks beginning to feel
earnings pressure they didn’t have following
the 2008 financial crisis. Investor expectations for banks are gradually changing from
capital preservation to earnings—and banks
make money by lending.
The early part of phase two starts with
banks searching only for lower-risk lending
opportunities (e.g., a small business with
a good track record and lots of financial
strength reflected in a good net worth,
decent liquidity, and a relatively high personal FICO score). These candidates, for
the most part, have been provided ample
credit during this recovery. However,
banks haven’t changed their conservative
risk profiles, and they aren’t finding many
additional candidates with those attributes.
As banks move further into phase two
they will increase their tolerance for risk,
but only if they can be convinced the additional risk is modest—not only for their
own credit appetite, but also for regulatory
oversight reasons. To do so, banks are learning another way to assess small-business
risk, and it’s becoming the centerpiece of
the “new normal” in lending.
The centerpiece is using a franchise
brand’s performance history to prove its
creditworthiness. No other type of small
business can do this, which creates a distinct advantage for franchising. I’ve previously described how unit, system, and
franchisor performance combine to give
both program and transaction lenders
very good information they can use to
extend credit. This information, packaged
in FRANdata’s Bank Credit Reports, is
drawing lenders to franchising because
the reports allow all types of lenders to
understand the risks associated with franchise lending. This improved understand-

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Multi-Unit Franchisee Is s ue IV, 2012

ing is beginning to draw lending capital
away from independent small businesses
and toward franchised small businesses.
Built on the solid logic that better information leads to better credit decisions and
more credit, this information and more is
now available to lenders on the Franchise
Registry website—changing how lenders
underwrite franchise loans.
In the process of developing these
new tools with lender and franchisor input, another powerful idea came into being. Connecting prospective and existing
franchisees seeking additional capital from
lenders is a slow, inefficient process. Franchisors start with a prospect long before a
financing package can be assembled; and
lenders want to screen and be introduced
to good prospects as early in the process
as possible so they can build a relationship.
After some brainstorming among franchisors, lenders, and FRANdata, an epiphany
of sorts occurred: What if we turned the
traditional model of franchisees and franchisors finding lenders to a new normal
model of lenders finding franchisees?
Boefly started down that path of addressing the inherent inefficiency by helping
franchisees put together financing packages
and showing them to lenders through an
online website, but that occurs late in the
development process. On the Franchise
Registry website, if we added franchisors’
criteria for screening prospective franchisees, lenders would be able to identify
candidates that meet their credit boxes at
earlier stages in the franchise development
process—which would give lenders and
franchisors more confidence that a deal
will happen. So we added search tools for
lenders to do just that.
Then we took it one step further. Lenders asked if we could show actual credit
information for prospective franchisees.
Franchisors said th