Lending lockdown leads franchisors to get creative

Lending lockdown leads franchisors to get creative

Dan Stone, director of franchise sales at The Melting Pot [3], a 140-unit-plus casual-dining chain, had spent months courting national lender CIT Group to garner preferential treatment for the fondue chain’s franchisees.

He wrote letters to CIT’s head of small-business lending, Christine Reilly, and the Tampa, Fla.-based franchisor even agreed to make payments and run the restaurants of franchisees that default on loans for a full 12 months. Stone said he worked hard to familiarize the national lender, one the largest providers of Small Business Administration loans and a growing presence in the restaurant industry, with The Melting Pot story. In May, he said he was making progress, and was eager to call CIT a lending partner.

Last month, it all fell apart as New York-based CIT teetered on the brink of bankruptcy before garnering a last-minute bailout from its own lenders. CIT now faces a long financial restructuring.

“I’m frustrated that the powerhouse lenders, the lenders that the industry had come to rely on, are just not lending,” Stone said last month. “The so-called preferred lenders are not preferring to lend.”

CIT Group is just the latest large player to close its doors to restaurant financing. Last fall, as the credit environment hit a deep freeze, reports of a lending halt at GE Capital and Bank of America were ever-present.

Franchisors couldn’t help franchisees negotiate with national lenders, and independent restaurants couldn’t garner loans from the Small Business Administration or local banks.

Nearly a year later, no thaw is in sight. While many lenders claim that they are still negotiating loans, operators contend that the hurdles to securing financing are growing loftier, not melting, forcing many, like the Melting Pot’s Stone, to step up their creativity when its comes to securing capital.

“We’re still looking to grow,” Stone said. “I’m trying to remain realistic yet positive.”

This year, four franchised locations received the necessary funding to open, he said, and 19 locations are in development.

To help spark growth, some franchisors have stepped in to help franchisees and potential franchisees by reducing royalty rates or offering micro-loans. Chains such as Quiznos [4], Marco’s Pizza and Domino’s Pizza [5] have agreed to help franchisees purchase new locations, finish building projects or remodel existing locations.

Others, like Roark Capital Group, the parent to Focus Brands-operated chains including Moe’s Southwest Grill and Schlotsky’s, as well as Edmonds Capital LLC, parent to Petrus Brands-operated chains Shane’s Rib Shack and Planet Smoothie, have agreed to help potential and current franchisees through new investment models and the sharing of best practices at franchisee conferences.

“We’ve been doing our best by being as creative as we can,” said Steve Romaniello, a managing director at Atlanta-based Roark Capital. “We will work with lenders on a deal-by-deal basis, maybe finance a portion of the application fees or reduce equity requirements, or create direct pools of financing for our brands, with our support.”

Shane’s Rib Shack recently debuted a new owner-operator model that would allow potential operators or franchisees to get into the system for just $10,000.

“One of the drivers for this model is the tightness in the credit market,” said Chris Morocco, chief executive at Atlanta-based Petrus. “We see a surplus of great talent out there, and if you could wind the clock back, those folks wouldn’t have a problem with financing.”

Restaurateurs should also think creatively when in comes to securing financing in the current environment, according to brand owners. Among the suggestions:

Be prepared to be turned down—numerous times.

Collect more collateral and more cash, as some deals won’t be considered without higher capital requirements and larger amounts of equity.

Seek additional funding sources, such as family members or another franchisee, who could be willing to partner on a new location.

Look to local banks that are not hampered with federal bailout money or other government trappings.

Consider development in locations that encourage new businesses and may have economic-development authorities that can provide financing.

Despite the difficulties in winning financing, lenders maintain they are committed to the restaurant industry.

“We have stepped up our origination efforts and have increased our funding targets for this year,” said Darren Kowalske, president and chief executive of GE Capital, Franchise Finance, in an e-mail statement to Nation’s Restaurant News. “In recent months, we have even stepped in to fund transactions when other lenders were unable to.”

Kowalske said that liquidity seems to be improving and that GE is seeing increased opportunities, even though transactions are more challenging than ever to complete.

“When we review an opportunity, we look closely at the operator’s strategic position and want a high confidence level in their ability to execute,” he said.

“Borrowers need to be even more strategic in this environment,” he continued. “Whether it’s new opportunities or managing their existing portfolios, it’s better if they can help their lender understand what is happening with their business. It’s better to be up front so lenders can more quickly and flexibly help them work through any opportunities or challenges.”— [email protected] [6]