As the economy continues to struggle and fears of a double-dip recession intensify, restaurant franchisors are embracing new tactics to help secure financing for franchisees who want to grow but lack the funding.
With the current lending climate showing few signs of improvement, restaurant chains are stepping in to help both incipient and veteran franchisees who might require capital for anything from equipment upgrades to opening a first store.
Marco’s Pizza developed several financing programs over the past few years to get more potential operators up and running. The Toledo, Ohio-based chain’s latest such effort, personal-guarantee insurance, is aimed at getting more bank loans for franchisee candidates and speeding up the process by covering up to 70 percent of the borrower’s liability.
“It’s similar to a private SBA program, but it provides the bank with a higher level of underwriting confidence that they’ll get paid, because the insurance company’s on the hook [for most of the balance], not the borrower,” said Marco’s chief financial officer Ken Switzer. “We think this can be an absolute game changer in finance, helping all kinds of small businesses, especially restaurants.”
Rather than forcing a franchisee to surrender the family home as collateral, personal-guarantee insurance, or PGI, safeguards an operator’s assets in the event of a default on a bank loan, Switzer said.
Should the operator default and owe hundreds of thousands of dollars after the business is liquidated, the PGI policy can repay the bank as much as 70 percent of the balance. Marco’s has agreed to supplement the guarantee with its own pledge to cover another 5 percent, meaning the franchisee covers just 25 percent of the balance, possibly working out a payment plan and avoiding bankruptcy.
Gary Levy, director of the hospitality industry practice for J.H. Cohn LLP, said uncertainty in the stock markets may put more pressure on a lending environment that still hasn’t recovered from the shock of the financial crisis. Franchisors and franchisees of any size still will need to think creatively to bankroll growth, he said.
“It’s easy for the banks to just be more cautious,” Levy said. “But it depends where you are in the life cycle of the company. Bigger chains have more competition to get money and put it to work, and those companies with bigger earnings and a better geographical spread likely have a better chance at getting funded.”
Levy said startup or emerging concepts might have more success getting funding from local banks, several of which are lending in the restaurant industry and are “smart about the covenants they’re placing on the borrower.”
While Levy had not seen any prior PGI programs in the restaurant space before, he said the loan guarantee program likely would appeal to smaller banks looking to control their risks.
Equipped for success
More mature brands also are looking for ways to help franchisees arrange funding for the installation of new equipment required for product rollouts. For example, Wendy’s is helping franchisees fund its two big menu initiatives this year: the October launch of Dave’s Hot ’N Juicy Cheeseburger and the ongoing test of breakfast.
Wendy’s has offered to subsidize a lower interest rate and provide loan guarantees for the $20,000-per-store capital investment in kitchen equipment necessary for the new burger, officials said. In the breakfast test, which is expected to expand to 1,000 locations by the end of the year, Wendy’s will provide $25,000 loans to early adopters of the program and reduce the royalty requirement from sales of breakfast items so that franchisees could fund local advertising.
“The driver for this program from a financial standpoint is just to make sure that our franchisees have access to financing sources for these programs,” chief financial officer Steve Hare said during The Wendy’s Co.’s second-quarter earnings conference call. “I think there’s a high level of excitement around these programs, … so we wanted to make sure that financing was available to them.”
Wendy’s also is offering new-store development incentives to franchisees in the United States and Canada that includes reduced development fees and royalties in the former and lease guarantees in the latter.
Like found money
Some franchisors turn to specialized brokers that help match franchisees with lenders. Marco’s works with one such firm, which also has secured franchise loans with other foodservice operators, including CKE Restaurants Inc., Culver’s and Popeyes Louisiana Kitchen.
Marco’s Switzer said partnering with brokers to offer personal guarantee insurance not only expedites lending, but also allows the chain to work with current employees who would make good franchisees if it weren’t for their lack of net worth.
“The fact is, we’re seeking all candidates,” Switzer said, “and in the foodservice industry, there are a lot of highly experienced people who have been managers and unit-level operators that don’t have the net worth that they need to have.
“For us to get the best people, we’re willing to turn over every stone,” he said.
PGI also enables current Marco’s franchisees to fund more store openings if their personal net worth covers the cost of opening just one store, he added.
Switzer said the insurance company charges about 1.5 percent to 3 percent of the loan amount per year as the premium for personal-guarantee insurance.
“It’s relatively expensive, but the borrower may not need it for more than a few years,” he said. “If the store does well, the bank may not feel the need to keep the coverage in place, and then the borrower may not need it past the startup phase.”
Matt Haller, director of communications for the International Franchise Association, said the trade group’s research shows that lenders are supplying only about 80 percent of the demand for franchise funding in 2011. That translates to between 8,000 and 10,000 businesses not opening and about 80,000 jobs not being created, he said, making creative financing moves crucial for franchisors and the economy at large.
“Banks want their return on investment,” Haller said, “so franchisors can show that, by recruiting the right franchisees, we have what banks are looking for.”
Contact Mark Brandau at mark.brandau@penton.com.
