3 min read

New Considerations in Lending

New Considerations in Lending

Those of you who have been in franchising for a while probably remember the Great Recession and its aftereffects. Banks were suddenly facing unprecedented scrutiny, and risk tolerance dropped to zero as they were burdened with new regulations and fail-safes. Loans that had previously flowed to brands were suddenly being held up. Banks wanted franchisors to prove that they had “skin in the game.”

The onus to prove viability shifted from the franchisee (borrower) to the franchisor. Item 19 came into full bloom as brands vied to prove their worth.  The smarter franchisors were quick to adapt and complete the requirements for the Bank Credit Report and the Franchise Registry. Many changed their FDDs to show that they were willing to back the franchisee with royalty payments that ramped up other investments. Their financial statements became more detailed. This really wasn’t negotiable; if you wanted franchisees funded quickly for a fast ramp-up, you changed.

The Pendulum Swings... Again

The pendulum is now swinging back towards the franchisee. Interest in franchises is increasing, which is typical of weak job markets. Across the board, brands are talking about a surge in franchise applications, discovery days, and licenses. People want to feel more control over their lives and are investing in themselves.

Meanwhile, the banks are writing loans. Even with SBA backing and extensive government requirements, banks have written more loans in a matter of weeks than they do in a year through PPP and EIDL programs. And now prospective franchisees want and need money to open new units. This time, it’s up to them to prove their worthiness. What will franchisees be able to do to open and flourish in these uncertain economic times?  



The Next Steps

As reported by Sherri Seiber, COO and Shay Mora, VP of Lending at FranFund, some SBA lenders have started to ask borrowers to sign an “Adverse Change Certification” or “Adverse Change Questionnaire.” The documents vary by lender. Per Ms. Mora, these are some of the common questions now being posed to franchisees:

  • How do your state’s COVID-19 regulations affect your business opening?
  • How do you plan to have a successful business opening and be fully operational (e.g. successful pre-sales, heavy marketing, etc.)?
  • What steps will you and your business take to cope with COVID-19 (e.g. temperatures screening, capacity-limiting solutions, sanitation plans, etc.)?
  • How will your business operate (e.g. changes to the business model, expected revenue, etc. due to COVID-19)?

Appropriate Responses

How does the franchise candidate manage these responses?

  • If any of these are negative changes, does the candidate have any solutions to help remedy their impact?
  • If there are any positive effects/outcomes of the COVID-19 environment, be sure to include them and explain (e.g. because hair salons have been closed for weeks, sales are - or should be - very successful because people are long overdue for appointments).
  • List everything else you think makes a strong argument about why this loan should be funded to help the business open soon.
  • If this loan is for an existing franchisee who received rent relief or royalty relief, explain that, as well as the terms for paying it back.
  • Do what you can to put a positive spin on the explanations as to how the business will be successful amidst any current or future COVID concerns.

Although banks aren’t scrutinizing franchisors directly, it’s to their advantage to help franchisees and candidates communicate the brand’s strategies and tactics, newly enacted brand standards, and business plans. They should cite things like improved supply chain stability, price adjustments, and marketing campaigns. And they should be certain that all permanent changes are immediately incorporated into manuals and training, and that they’re featured in the tables of contents and training matrices in their FDDs. Franchise brands should consider having their marketing departments create a branded one-sheet that the franchisee can include in the loan application package.

FranFund recommends that their franchisee clients consult with their franchisors about the contents of the loan package, since most have detailed plans in place. The clients should then send that information for review before submitting it to the bank. Franchisors should check to make sure their funding company offers that review service.

Two people discussing business information



A pendulum has a way of swinging back and forth. It will swing back towards the franchisor for scrutiny at some point. By helping franchisees now, they can be better prepared when it does, while building strength back into the system now.

Franchisors who would like more information about new considerations for lending should contact Shay Mora at smora@franfund.com.

Existing and prospective franchisees who need funding to start or expand their businesses should schedule a free consultation to learn more about all of their financing options.

We would like to thank Mary Ann O’Connell at FranWise for this guest blog contribution. FranWise is a franchise consulting firm specializing in strategic planning, operations, and compliance. For assistance with updating your manuals, contact Ms. O’Connell at maryann@franwise.net.


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