How to land a conventional loan in multi-unit franchise expansion
Words by Mike Rozman
While an estimated 32,000 franchised locations closed their business in 2020, many resilient franchise owners weathered the storm and found opportunities to innovate and expand their operations. Simultaneously, it is reported that two-thirds of wealthy business owners plan to sell or retire sooner due to the pandemic. These owners are either ready to take on the next phase of their lives, inspired by lockdowns, or seizing opportunities, with motivated buyers to leave their business on a high note after surviving the pandemic. With low-market value leases and interest rates alongside a larger number of motivated sellers, acquisitions have become a lucrative opportunity for existing franchise owners to expand their footprint. For those who are interested in multi-unit expansion and acquisition, the next step in the process is to consider financing. Financing, or even refinancing of an existing loan, can seem like a daunting task when putting your businesses’ future on the line but it is remedied with knowledge and understanding of the loan marketplace. Drawing on my years in the world of franchise financing, I will walk you through the benefits to a conventional loan and steps to consider in financing when expanding your multiunit network.
Conventional loans vs. SBA loans
Many small business owners and franchisees get started with the help of the Small Business Administration
(SBA) loans because they lack the track record and financial wherewithal to secure a conventional loan. SBA loans provide more relaxed requirements for approval and usually have a lower down payment while also offering longer repayment terms. They do, however, include a collateral requirement which often means pledging your home. For these reasons, many businesses eventually look to graduate to conventional loans as their operational track
record grows. Conventional loans are not backed by the government like SBA loans are, so the bank assumes 100 percent of the risk if the borrower defaults. Because of this, most conventional loans require you to have a good credit score, strong financials and have an established track record as a business owner. Therefore, multi-unit owners are usually the investors who are seeking and qualified to receive conventional loans. For instance, three years ago,
Rakesh Kalotra and Rajesh Singh secured an SBA loan through my company’s platform, BoeFly, to acquire their first Checkers restaurant. Following the success of their first units, the duo was ready to expand their operations and sought the help of BoeFly once again to be matched with a conventional lender who refinanced their existing debt
and provided financing for a new restaurant.
Benefits of a conventional loan relationship
For a multi-unit operator, there are many benefits to consider when switching to a conventional. As a business owner, your continued ability to repay conventional loans establishes your reputation as a credit-worthy enterprise, enabling
you to borrow more with preferred terms when you need it. Owners can use conventional loans to cover their new development expenses, purchase equipment, or as working capital. Unlike SBA loans, conventional loans have a faster approval time and less paperwork, which can be crucial when on a time-crunch to secure a deal. Again, BoeFly assisted entrepreneur Eric Danver, Hand & Stone Massage and Facial Spa’s largest multi-unit franchisee with 19
units, in acquiring five more locations through a conventional loan. Due to Danver’s existing reputation as a successful multi-unit owner, it was easier for him to secure a conventional loan in a timely fashion in order to expand his business in a competitive marketplace. Overall, a conventional loan can offer more attractive terms. As mentioned previously, an SBA loan requires collateral typically in the form of a lien on the borrower’s house, while conventional bank loans do not. Additionally, multi-unit owners who may have reached the $5m SBA limit could be eligible to consolidate debt and refinance their loans at a lower percentage rate with a commercial bank.
Choosing the right lender
With conventional loans, lenders are taking on more liability and therefore have to thoroughly vet potential candidates to make sure they are a good loan risk. Lenders will need accurate and current data about a prospect’s liquidity, net worth, credit, and track record of performance. Franchise owners with their information organized and ready to access will find it easier to go through the process of securing a loan. Beyond creating a streamlined process, understanding a lender’s criteria will save time in the end. For example, franchise business owners find that certain lenders will only lend if there are at least 250 locations in the system. Lack of understanding can lead to frustration and a lengthier process. In general, borrowers should be prepared with realistic expectations and take setbacks into consideration when creating their lending timeline. Just as important as it is for the lender to verify a candidate, it is also vital for a
candidate to ensure they are partnered with a trusted lender. Before agreeing to work with any lender, go to your Secretary of State’s website or the Better Business Bureau and look for complaints or actions against them. Of course, having access to a wide range of reputable banks and lenders helps tremendously. Shop out your options of lenders and you could potentially save money on your overall interest rate, find more competitive terms, and avoid putting all your eggs in one basket should a deal fall through.
Know before you go
If you have gotten this far in your growth process and are considering financing for expansion, you have an understanding for your business potential and vertical market. On the other hand, financing may seem
like an entirely new beast to conquer and understand. There are plenty of online platforms and FinTech options that create an easy to digest system in the loan application process. Lean into technology as a way to vet lenders, organize your documents, and shop around the marketplace just as you would with a new pair of jeans from an online clothing store. In today’s day, we have all the information we need and expert advice at the simple click of a button.
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