ApplePie Capital is bringing investors to the franchise lending business.
The San Francisco-based startup officially launched this week a marketplace-lending program for franchises. Since its soft launch in November, it has already generated $25 million in loan demand from franchises, including those with restaurants like Einstein Bros. Bagels and Marco’s Pizza.
Marketplace lending is similar to crowdfunding, or crowd lending, in that it gives investors the opportunity to participate in a loan to an organization — in this instance, franchise businesses.
The difference is that marketplace lenders like ApplePie guarantee funding to the franchisee and then give qualified investors the opportunity to participate in those loans.
“We guarantee a franchise brand and a borrower that meets our criteria,” said ApplePie CEO Denise Thomas. “We have an open marketplace that allows qualified investors the chance to invest in this.”
ApplePie closed its first loan, for $465,000, to fund a new Einstein Bros. Bagels location in San Diego. The borrower, Marty Mares of Trei Inc., and an Einstein Bros. area developer, had tried traditional banking and found it “extremely daunting.”
Mares also worried about collateral requirements. “Through SBA [or Small Business Administration] financing, you lock up assets through collateralization that may be needed for future stores,” he said. “We reached out to ApplePie Capital and were able to structure the economics for our first location and create a financial plan for a multiunit rollout. And the loan provided financial flexibility that an SBA loan simply didn’t offer.”
ApplePie typically makes loans of $100,000 to $1 million, with terms of three to seven years, to franchisees of approved brands. The loans typically carry interest rates of 8 percent to 12 percent, and are secured by the assets of the business and by personal guarantees.
Sophisticated investors — or investors who are deemed to have sufficient investing experience to weigh the risks of an investing opportunity, based on federal standards — can then invest at least $1,000 to purchase fractional shares to fund a loan.
The loans can be attractive investments, Thomas said, because they provide a yield that investors can’t get buying bonds right now, given perpetually low interest rates. “These are good yields for investors,” she said. “None of us are getting good returns on cash in our accounts.
“I for one am an investor. I believe in the brand, and I want better returns than I’m getting in my cash account.”
The marketplace lender is part of a trend in which financiers are providing different options for franchises and other borrowers in the aftermath of the recessionary credit freeze that took hold in late 2008. As crowdfunding has become popular, investors have started using those principles in the lending world.
ApplePie starts by working with brands and judging them based on their performance history and the health of the brand’s operators. It looks at closure rates, why locations closed and particularly whether investors lost money in such a closure. For instance, it would look at a closure due to the end of a lease differently than it would a closure due to failure of the location or a bankruptcy.
“We’re looking at their performance history because it’s a proxy for what investors can expect and the risk level,” Thomas said. ApplePie also considers what the brand does to support franchisees, how the brand screens candidates and the help they provide franchisees that run into trouble.
Additionally, ApplePie examines the franchisee in the approved brand, using traditional credit metrics before deciding whether to make the loan.
ApplePie says it can provide funding on a loan is as little as 30 days. Everything is done online in a streamlined process. By comparison, an SBA loan can take as many as six months.
Thomas spent 20 years working to bring new financial service platforms to different industries, including private equity and secondary market trading of non-public companies. She has a history in the franchise business as a one-time investor in Supercuts, a haircutting chain. Her brother-in-law was a franchisee of Mail Boxes Etc.
She saw the $45 billion annual demand for capital for franchise businesses and thought it could use a different type of lending platform. “This is a very large market for a business like this,” Thomas said. “We think we can make a difference, improve people’s lives and offer new ways of doing things.”
This story has been revised to reflect the following correction:
Correction: Feb. 12, 2015 An earlier version of this story misstated part of ApplePie Capital's lending process. It can provide funding in as little as 30 days. Additionally, an earlier version of this story misstated Denise Thomas' relationship to the Mail Boxes Etc. franchisee. He is her brother-in-law.
Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze
