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Welcome to the Newsletter for December 10, 2004

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Franchisors Role in Franchisee Financing

A prospective franchisee does not become a franchisee until financing is in place. And franchisees generally can’t add units without external financing support. Clearly, franchisors have a vested interest in ensuring that franchisees obtain necessary capital.

Here is what our database research reveals:

• While we know a substantial number of franchisors provide informal external financing direction (generally along the lines of screening/approving specific lenders and working with selected lenders to better understand and anticipate the needs of a particular franchise system), only about 3% of systems have formal external financing programs.



• A substantial number of franchisors directly support an external financing program through participation in the U.S. Small Business Administration (SBA) Franchise Registry Program. (www.franchiseregistry.com)



• 25% of franchisors provide an active internal financing program for franchisees (often taking the form of deferred fees or direct access to loan funds)



• Less than 5% of franchisors indicate offering both formal internal and formal external financing programs

Our research further shows that the longer a franchisor has been around, the more likely it is that the franchisor will take an active role in franchisee financing. By far, most franchising companies are between 10-20 years old, and it is during that time that companies develop financing options: 12% of companies that have been franchising for 5 years or less have formal financing prorams, but almost 50% of companies that are 20 years old or more do.

As we have noted in past email newsletters, franchising is in a significant growth period, both in the number of franchise concepts and in the number of franchise units. Heightened competition for capital is an obvious consequence of that growth. A key source of capital has been SBA guaranteed financing programs and with the recent significant increase in appropriated funds for the 7(a) program to 16 billion, the SBA will be an even more important source of capital in 2005.

One of the most effective and easiest steps a franchisor can take to help franchisees with financing is being on the SBA Franchise Registry. This simple process can save franchisees headaches and franchisors time and money. Lenders actively use the Registry as part of their underwriting and encourage franchisors to apply.

Quiz Question

The U.S Small Business Administration will guarantee only a certain percentage of any loan granted to a franchisee. What is the highest percentage the SBA will guarantee?

ANSWER QUICKLY! If you answer the quiz question, we will put your name in a drawing to win a Targeted Market Report. (Did you know that most of our reports can be produced on a recurring basis? Ask about our subscription service.) Email me your answer.

Congratulations to Dennis Galloway of DRG Consulting Inc.! Mr. Galloway is President of DRG Consulting Inc. His company focuses on clients in the fields of franchising, real estate, finance, and consumer services. He provides strategic planning, marketing, M&A, business development and Internet and intranet strategies for e-commerce business solutions expertise.