March Part 2- The Money Connection

GE offers business loans to franchise operators

GE Capital Solutions Franchise Finance (commonly referred to as GE Franchise Finance) is a General Electric subsidiary that provides funding from $50,000 up to $200 million to franchise owners and investors. The firm primarily offers franchise financing, business loans, and commercial real estate loans, but franchisees can also come to GE for credit to buy equipment, fund expansion plans, or acquire new locations.

Executive VP, Dave Russell, says GE is a leading lender for the franchise finance market via direct sales and portfolio acquisition in the United States and Canada. "Currently, we manage about $12 billion in served assets. We have over 6,000 customers and about 20,000 property locations.

What sets GE apart from other franchise finance companies is the commitment to the long term. "We've been doing this for 20 years now," says Russell, "so there's a tremendous depth of industry experience here. In that time, we've demonstrated that we're committed to the long term in this industry. If you look at the track record of some of our competitors there does tend to be kind of an in and out. When the industry's hot they're in, when it's going through a dip in the business cycle they tend to bail."

GE is a direct lender with an unprecedented access to capital - a distinct advantage over most competitors. "We offer the ability to get these deals done," says Russell. "We spend a lot of our resources making sure that we're easy to use. That means being flexible in terms of our structuring as well as the ongoing monitoring of business performance. We provide a streamlined process with simplified documentation that allows transactions to close in a fraction of the time it takes to do a public offering."

Russell says GE works with the entire gamut of customers, from single unit startups all the way up to the large multiunit players. Despite the broad range of financial products available, Russell says there are four business events that the firm looks to finance: new construction, acquisitions, reimages or the refreshing of the system, and refinancing opportunities. "We understand the unique nature of the franchise business and can put together packages that may include any combination of, say, leaseback financing, real estate mortgages, equipment debt, and construction loans," asserts Russell.

GE also works with franchisors, partnering with them in a variety of ways. "We really believe in a strong partnership between us and the franchisor and the franchisee. It has to be a kind of triangle that's connected on all sides," says Russell. "We work with franchisors to try to put together financing programs that address the needs of the particular system. Let's say it's a system that has a re-image initiative that they're trying to push out there. They need to get financing for it in order to encourage the franchisees to adopt it. We can work with the franchisor to put together specific programs such as making funding available for equipment upgrades or consolidation activity in order to help them sell it within the system."

Funding for specific industries
GE provides funding to a handful of specific industries, including the restaurant, hospitality, automotive aftermarket, and beverage industries. Russell says, "We have a list of approved concepts that we lend to. It's a very broad list but it doesn't include every concept out there. However, any major national or major regional player would stand a significantly good chance of being financed by us." What it comes down to is a two-step process. First, you have to be within the right concept (meaning it is on the list). Second, you have to be evaluated in your own right to make sure you are the right kind of borrower.

Russell offers some advice for prospective borrowers. " We are in the business of prudently leveraging people in order to achieve their growth requirements so one of the things you want to avoid is over-leveraging yourself. And if you want access to capital and a long-term relationship with a lender, then it behooves you to be able to really clearly demonstrate the performance of your system, your ability to grow same store sales, and to operate profitably. You should also be able to demonstrate that you can weather business cycles whether the market's overheated or underheated. You need to show that you can still service your debt and keep your operation running and kind of come out of it on the up side. Really, you should want to be in a position where you can show off your business. It's a great opportunity to kind of brag about your achievements."

Contact Information: Dave Russell, Executive Vice President, GE Capital Solutions Franchise Finance, http://www.cefcorp.com.

Diamond Financial's niche is start-up franchises

Diamond Financial Services (DFS) specializes in securing financing for loans from $100,000 to $3 million. Loans might be used to apply for the purchase of a franchise that can include real estate, building and leasehold improvements, business expansions, equipment, debt restructuring, working capital, franchise fees, buying out partners, or for the start-up of a business enterprise. Loans for franchise start-ups are meant to cover the total investment including working capital and closing costs.

Donald Johnson, owner of DFS's New Jersey office (also known as FranchiseFunding.net), says that although franchisors sometimes use DFS to get expansion capital, 99% of the time loans are going to franchisees in need of start-up funding. "That's our niche and our specialty," says Johnson. "Our loans are done mainly through the SBA, which is the most popular common loan program." Johnson points out that not all SBA lenders are the same. "That's why many franchisors, area developers, and franchise consultants like FranChoice and FranNet and Entrepreneur Source come to us. A lot of SBA lenders don't like doing the smaller franchise loan because they don't feel they make much money on them. They'd rather do the larger acquisition and real estate type loans, but many of our loans are in the $100K to $500K range," says Johnson.

DFS is not a direct lender, but is rather the consultant and broker - the go-between. Johnson thinks that works in favor of the applicant. "Most of the time, it's someone's first time owning a business and they've never gone through the business loan process before. Franchisors and consultants like referring those people to us because we will hold their hand. For starters, we will first prequalify them and let them know their loan potential even before they've chosen the franchise. Then, once they've chosen a franchise and they've gotten the approval, we provide full service in helping them put together the loan package. We know how to custom design the package to emphasize all their strengths and we know what the lender looks for." Johnson says most loans get declined because it's either not packaged right or the loan is not sent to the right kind of lender. "We work with over 20 lenders nationally. Our high success rate comes from a combination of taking a particular franchisee to the right lender plus the way we package up the loan."

Local banks are not the best bet for funding a franchise
One of the most common mistakes new franchisees make is going to their local banks for start-up funding. Studies have shown, for example, that in one year over 21 million small business loans were applied for through local banks, but only 4 million were actually funded. "Most people do want to work with their local bank right down the street where they can see and sit and talk and shake hands, but that's just not the way it is these days. For that local bank, the bottom line is they're not going to be an aggressive franchise lender. It's the same old story; lenders don't like doing these smaller sized loans. They feel it's risky because it's a startup. Even though it's a franchise that has a lower failure rate than a non-franchise business, the lender will still look at it as a start-up loan that's risky because the people probably don't have experience in the industry. Chances are, the local bank doesn't understand the whole franchise concept," says Johnson.

Johnson says DFS can increase a new franchisee's chances of approval and also get them better terms. "Let's say someone is starting up a Subway. The local bank might only offer 5 or 7 years whereas we can get them 10 years. That is really going to help their cash flow starting out because of the lower monthly payment. The down payment is going to be less, too. On a start-up, a lot of lenders are going to be 30% or more, but we are usually in the 20-25% range. And our loans include working capital that people need once they open; there is a little cash reserve built into the loan so they're not using their own cash for working capital."

"People come to us every month that have been turned down by the local bank," says Johnson. There can be a lot of reasons for that. Our job is to put them together with a more aggressive lender with whom they can build a track record and a relationship." The key to getting a franchise loan to sail through, says Johnson, is to go with a firm that specializes in franchise lending.

Donald Johnson, owner of Diamond Financial Services, New Jersey office, www.FranchiseFunding.net, (877)508-2274.