Don’t Put All Your Eggs in One Basket

For many franchisors operating within today’s market conditions, the term “franchise financing” can be perceived as a four-letter word. When times were good, many companies made the rational decision to develop relationships with one or two key lenders. The route was beneficial because of economies of scale, because it would yield more competitive rates for franchisees using a lender with significant holdings of the brand’s franchisee loans. The lender would get to know the brand inside and out, and would in result understand the business. This familiarity would translate into an ever-increasing competitive advantage over other banks that did not have this close relationship, and therefore could not offer these kinds of lender-related services to franchisees.

But since the economic downturn began during the first half of 2008, many of the larger banks began to shy away from these tendencies. Others were not as lucky, as pulling back was not enough. For these large, troubled banks, the economic downturn meant bankruptcy, closure, and bailouts. But what happened to these franchisors that had relied on these large banks, as well as franchisees counting on loan commitment letters? Many were left out in the cold – forced to find alternative financing sources with lenders who were unfamiliar with the nuances of their prospective franchisee brands.

The proverbial “eggs in one basket” conundrum can now be seen in full effect. Today, many franchisors have started to take a different approach – one that we fully support. At Sunbrook Academy, we’ve recognized the pitfalls of failing to diversify the mix of lender resources available to franchisees. This reason is why we have created solid relationships with loan brokerage and resource partners that have multiple relationships with banks of different sizes and geographic range. This strategy has offered the opportunity for lenders to actually compete for franchisee loans. And so far, it’s working.

While many of the larger banks continue to hold their cash, many smaller local and regional banks are still in business. For a brand like Sunbrook, that has no franchise failures, loan defaults or litigation, banks are eager to consider supporting our franchise growth. Being a part of the child education industry certainly helps additionally, as well as the fact that our industry holds a prominent position on the SBA index with one of the lowest default ratios across all industry segments.

If one thing has become clear, it is that the benefits of choosing only one or two lenders for your franchisee borrowing needs can be offset by the potential constraints on the access to capital during times of tough economic conditions. Diversification and competition amongst lenders is crucial to ensuring your franchisees have the best options available.