What FRANdata Thinks

Lenders Look for Better Understanding on How Franchisors are Coping and Planning for Change

September 24th, 2021 by Edith Wiseman

FRANdata has been championing franchise lending for more than 15 years. Aside from speaking to hundreds of Franchise Registry lenders members, we also go to several lender conferences every year, updating lenders on the outlook for franchising and the soundness of the business model while getting to the pulse of franchise lending straight from the source. Lenders tell us that they are busier than they have ever been in their careers. They anticipate that the pandemic will not be abetting anytime soon and have adjusted their lending process accordingly. Here are some underwriting guidelines that they mentioned at the latest conference. 

Areas Lenders need an understanding of: 

From Franchisees: 

  • How other loans (PPP EIDL) could affect business cash flow.
  • What impact has the COVID-19 and delta variant had on the business.
  • Lenders have to discuss the impact of current market conditions have on collateral value (commercial, residential values – sustainable over time, hotel valuations are coming back on business valuations, change of ownership valuations EBITDA adjustments). 
  • Give an understanding of where the accountant is putting tax incentives and PPP forgiveness – everyone has a different spin on how they are looking at it. (many lenders back out non-recurring revenue). 
  • Must show a good review of the interim results. The franchisee should highlight the improvements and how they are sustainable with a focus on liquidity. 


From Franchisors

  • How have any restrictions impacted the franchise system’s cost projections, supplies or inventory 
  • What other shifts to adjust to new mandates – such as providing specialized gear, cleaning material etc. 
  • Are the historical results reliable based on the current market — is the recovery sustainable? 
  • How concentrated or diversified is the customer base and the franchise system’s vendor/supplier pool? 
  • Expect elevated due diligence in these cases. 
    • Change of ownership
    • Any loans where 50% or more of the loan proceeds are for working capital  
  • Based on what the franchise system experienced, are the projections reasonable? 
    • The franchisee must present detailed assumptions.
    • Back-up to the assumptions (interim results, update business plan)

 Expected from either franchisee or franchise system 

  • Revenue reductions
    • Why (closure, loss of customers, inability to obtain inventory or supplies, loss of
      • Have expenses increased (required increase salary for employees, increased cost of supplies/inventory)
  • Plan for turnaround  
    • What is the strategy (especially with the rise in the delta variant)
    • Where can they reduce expenses?
    • Is there an alternative delivery system (curbside, delivery, shift product, etc.)

Given the items above, do you feel that you or your franchisees currently provide the right level of information to lenders? Will you have the information at the ready if or when your franchisees approach you with the requirements stated above? 

What does this mean for Franchisors?

Franchisors need to address their system’s survivability and their franchisee’s need to address cash flow in the event of a shutdown. Especially in a state with a history of having stringent shutdowns. How do you plan to “survive” regardless of where you are located. Because of this, lenders want to know in deeper depth how franchise systems are performing this year vs. last year.

It is essential now more than ever to help your franchisees understand the deeper needs lenders have when it comes to underwriting a franchise loan – preemptively anticipating and providing the needed information will ensure that their loan is processed efficiently and with the least amount of delays.

Schedule a call with a capital access advisor to learn more about what you can do to provide more information to lenders in the current lending environment.


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