Going From Risk to Rewards

February 26th, 2016 by admin

Profits losses road sign

Going from Risk to Reward

Understanding FUND –  The Credit Score of Franchising

by: Ritwik Donde, Senior Research Analyst

A good credit score is what every borrower aspires to and what every lender wants to base their portfolio on. A credit score is one of the most important determining factors not only for when it comes to granting a loan – but also in determining the right rate. But what happens to credit risk when the borrower is a part of a bigger franchise system? Credit risk is tied to the success of a franchise brand as this forms the foundation from which the borrower is able to perform. Therefore, it is important to assess the credit risk of a franchise system when lending to a franchisee-borrower.

Akin to a FICO score, FRANdata has developed the FUND scoring system to assess the credit risk of a franchise. Much like the FICO analysis, the extended credit score assesses a franchise brand based on transparency and performance metrics. Let’s take a look at some of the similarities between an individual’s personal credit score and a franchise brand’s FUND score.

Similar to how FICO places the highest importance on historical performance of a borrower’s ability to make timely debt payments, the FUND score emphasizes the historical ability of a franchise system to successfully retain franchised units.

In addition to examining the performance of a system from a unit-perspective, the FUND score also looks at various franchisor-related attributes such as franchisor’s financial performance, support systems and money spent to maintain or develop the support systems, to name a few. This allows lenders to gauge franchisor sustainability during the time period when the franchisee/borrower is expected to repay his/her debt.

Franchising is a complex world when it comes to assessing credit risk, the FUND report aims to simplify this world in a framework of metrics within which lenders can make quick and efficient lending decisions. Lenders cannot afford to risk missing key pieces of information. The FUND score and report look across the spectrum of publicly available information, third party information deemed to be reliable, and our own 26 years of franchise business model expertise.

A franchise brand’s risk profile is equally if not more important than a borrowers risk profile. That’s why looking at FICO when underwriting franchise loans is not enough. A FUND report and score serves as a bridge to mitigate the unknowns in franchise brands. It is a report designed for lenders, by lenders; examining key influencing variables across the franchise universe to judge the relative “fundability” of a franchise system.

For more information on FUND email us at franchiseregistry@franchiseregistry.com or call us at 800.485.9570.