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10/16/2019

Financing for Your Franchise: What Lenders Want to Know

Tag for article:Franchise Financing

Fall is a time to repair, refresh and even rebuild. That’s why many franchisees find it the right time to invest in the latest equipment and technology. But keeping your franchise up-to-date can be challenging unless you have the cash you need to protect your bottom line. That’s where financing can come in. The application process may seem daunting, but when you’ve done the appropriate preparation it becomes a lot easier. With that said, here are the five key factors lenders consider in evaluating your franchise business.

Your Brand

The brand of your franchise is likely to have a large impact on your application. As will performance metrics such as same store sales, average unit volumes, COGS & labor expenses and operating margins, and expected unit-level EBITDA. Whether a single or multi-unit franchisor, how do you perform against these benchmarks? Against industry averages? Such measurements provide context for lenders.

Ownership Profile and History

You are the responsible party for your business, so lenders will study you as an owner when determining your creditworthiness. They’ll look at whether you’re a financial buyer with operating partners or an existing owner/operator, for example. They’ll be interested in the purpose of your franchise financing as well as your short- and long-term growth objectives. They might also examine your operating infrastructure to determine whether it is robust enough for your franchises to be successful.

Attrition

Two types of attrition can wave potential red flags for a lender. Orderly attrition means a controlled closure for strategic or financial reasons; disorderly attrition refers to an unintended closure caused by poor performance. While store closings aren’t always a bad sign, a pattern of unplanned closures will likely cause concern for a lender.

Asset Quality

You should be fully confident in the quality of your stores before applying for financing. A lender’s comprehensive evaluation might include criteria such as the traffic patterns around your locations, how recently your establishments have been renovated, and how closely they match the standard for all your franchise’s locations.

Sector Trends

Broad category trends may influence your financing application. Lenders will look at which types of franchises are in growth mode and which are in decline. Your brand will be evaluated to determine if you are responding to, driving, or missing market changes and demands. For a broad understanding of sector trends, most lenders will consider portfolio performance over years or even decades.

When you know what lenders are looking for, the application process is a lot less stressful. CIT is a trusted advisor to franchisees, and we make it our business to help customers get the financial products and services they need. If you are a franchisee seeking financing, get smart thinking and peace of mind by choosing an experienced lender committed to your future. Learn more about what CIT can offer you for franchise finance!

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