Franchise financing, 14 recent changes

I am not a Franchise Finance source, but I know many lenders and have spoken to many experts in the field, and each one has shared with me the changes they have implemented in their company. So take a look at these changes and see for yourself if they have altered the financing myths you believed in the past.

• you need relevant industry experience unless the training is deemed adequate and the Brand very stable
• you may not borrow on your credit line for your cash injection, and your credit limit is probably already frozen at a lower level than first offered
• Credit card limits have also been dropped to lower levels to prevent you building up large balances and then defaulting, thus depriving you of some emergency funds you thought you had. Even interest rates have increased here
• you must provide adequate collateral, a difficult task in a declining housing market
• your cash flow projections must show debt service, owners’ draw, the break even point, and all assumptions on which the figures are based.
• expect more scrutiny of the franchisor, the applicant, the industry, and business plan
• your post purchase working capital requirements will be higher than acceptable in previous years and your down payment required may be closer to 40% or 50% in some instances, so you take a greater risk and the Bank feels more comfortable(you have more invested, they have less invested and debt service is lower)
• they may even insist on some seller financing on the purchase of an existing franchise business
• their coverage ratios may have changed to higher levels as a hedge against risk of cash flow shortage. This leads to more loans rejected for not meeting their threshold
• existing franchisees buying or building new stores may have to cross collateralise their other stores or assets, or offer a blanket lien, but they have better chance at the 25-30% down method
• rates of interest will be higher for a higher perceived business risk and poor economic conditions
• valuations and rules of thumb may be more conservative; independent valuations are required by the SBA on some of the larger deals
• some require you to demonstrate another source of income to survive with while the new project gets under way, such as spousal income, passive income and such
• your Credit scores need to be higher with NO Late Pays; the 630 score of yester year does not impress anyone today
• you may need a co-borrower and co-guarantor to beef up your credit profile, collateral, and reduce their risk 
• some banks have pulled out of the SBA lending game altogether, so the remaining players have tightened the rules