Banks lending to franchisees

There’s fact and there’s myth when it comes to the banks lending to franchisees.

The fact first.

Franchising is a successful route into business ownership. My favourite stat is provided by the International Franchise Association: 92% of franchisees are still trading after five years, but 80% of other small businesses aren’t.

Whether that ‘fact’ really is a fact is debatable, but the thought is true. Franchisees, generally, are supported by their franchisor and therefore find it more difficult to fail.

So here’s the myth. Banks like lending to franchisees because of this fact.

Nope.

First and foremost banks don’t like lending to anyone at the moment, not even franchisees. (Which is outrageous given the amount of our money pumped into their coffers to provide much needed liquidity… but that’s a rant for another time).

They do like lending to franchisees of well run, nicely established franchisors who can demonstrate a track record.

On the face of it, this may seem like a downer for lots of businesses who are contemplating the franchise growth route.

But not necessarily. What franchisors fail to recognise is that the banks are there to be influenced, just like anyone else. There are a couple of very simple things a franchisor can do to exert influence.

The first, of course, is to be able to point to an operation that is succeeding. This might be a Head Office pilot or there might be a franchisee on board already.

From the pilot a good franchisor will extract a realistic business plan and write it down. A good franchisor will already have the operating system templated and blueprints for running the business written.

Critically, this is where the error occurs. Franchisors don’t do anything with this gold dust. A switched on franchisor will make appointments with all the banks that have a Franchise Department.

They will explain their operation, the financial package and the business plan. In short, they sell themselves, as if they were going for the money themselves.

Then, when a potential franchisee is ready to approach the bank for finance, the switched on franchisor will be able to say ‘Go and see so and so from X bank’. (Substitute the Bank Manager’s name for so and so.)

The bank finds it easier to lend when they know the operation that is supporting the franchisee. If they understand the business, their only assessment will be of the franchisee – not the franchisor as well.

So, if you are a franchisor and you don’t want finances to be a blocker in your recruitment pipeline, get yourself round the banks to outline your package. It won’t guarantee your franchisee the funds, but it makes it easier.

Of course, it would help if the banks were lending as they should be… but that’s a rant for another day!

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