Hotel franchisors can provide more numbers, metrics, and data for small business loan underwriters than the average mom-and-pop start-up. The brand identity of the hotel also accelerates lender acceptance.
The more information you submit, the less likely lenders are to shake their heads from side-to-side when your hospitality financing loan comes across their desks.
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| Bob Coleman |
Loan underwriters will look at the support you provide your franchisees. Do you offer management training? Do you practice co-op advertising? These are advantages in the lender’s eye because the training accelerates how fast the entrepreneur is prepared to enter into the business plan and operate successfully.
The training should be based on tried and true strategies; lessons learned at the expense of someone else.
“Co-op advertising just means the franchisor can pitch in to reach a broader national audience if the brand’s large enough, so that every owner gets the benefit of those investments,” says Charles Green, author of the “SBA Loan Book.”
“For a lender, a franchise business owner isn’t starting from scratch, so they aren’t as concerned with the business idea or strategy because they know the borrower will be using a playbook that has been developed, tinkered, and improved over the years.”
Some lenders choose to focus on certain sectors and franchisors to lower their risk and manage their portfolio, depending on their loan policy and risk appetite. Those that specialize can be helpful because they often understand the grey areas of what can and can’t be done.
SBA’s Franchise Tools
The SBA has an extensive track record for franchise businesses.
“More than 1,000 franchise concepts have been financed with (Small Business Administration) guaranteed lending, which is today some 11% of all outstanding SBA loans,” Green said.
“The real benefit of that is it will only grow with time and there is an enormous amount of SBA data on franchises that is available and continuing to be developed.”
“You can parse the data in very deep dives to evaluate the likelihood of these loans performing and even how the franchisor responds to adversity,” Green said. “If there are problems with a particular operator, knowing how the franchisor may respond provides some insight into the kind of risk and the kind of value that franchise has for you, the lender, and the outcomes that may not be predicted.”
The SBA is like a second set of eyes on a living, breathing portfolio and provides annual updates to this information broken out by the different franchises, the defaults that are incurred, the write-offs that happen, and more. These provide you with an indication and one more piece of evidence that’s not available in other kinds of lending.
“It’s instructive to know that SBA guaranteed franchise loans were charged off 28% fewer times than non-franchise loans over the past 10 years,” Green said.
“That’s a pretty strong statement, more than one in four, which I think is probably the best metric to indicate some advantages to franchise lending. It is conformity of information and plenty of room and responsibility to still have to underwrite the credits, but it gives you a running start on what can be a lower risk, a safer bet for your lending.”
Franchises are underwritten just like any other business, just with more data available from more sources of comparative information.
“Lenders can underwrite franchise businesses as a distinct group of loans and break them down with metrics that are based on the sector or specific brands,” Green said.
The good news is that if you are on the SBA’s Franchise Registry, you are already a huge leg up on any franchise that isn’t. The registry is the SBA’s “pre-screen” process and lets the lenders know your borrower is a viable option. Without being on the registry, your franchisee is ineligible for a SBA loan.
The SBA has become active in hospitality financing, and some community banks and credit unions are almost exclusively using the SBA in these types of transactions. In fact, the hotel industry is the top franchise type financed by the SBA 504 and 7(a) loan programs.
Between fiscal year 2001 and fiscal year 2011, there have been 4,978 SBA 7(a) and 504 loans made to the entire industry, with a total approval gross of just more than $6 billion. The industry also boasts a low charge-off percentage, with the total charge-off for the industry between fiscal 2001 and fiscal 2011 of less than 1%, a strong record of performance.
Bob Coleman is the Author of "Money Money Everywhere And Not a Drop For Main Street." Coleman is the Editor of the Coleman Report, a trade newsletter for small business bankers. He is the nationally recognized expert on small business banking. He has appeared on Fox Business News and CNN and has been quoted by most major financial media outlets including the Wall Street Journal, New York Times and Bloomberg. He has spoken at numerous small business banking events across the United States, including international engagements. Coleman has a B.A. in Medieval History from the University of Southern California and a M.B.A. in Real Estate Finance from the University of Southern California.
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