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10/24/2018

Conquering Financing Fears as a Franchisee

Franchise Financing

Now that summer is officially behind us and Halloween decorations are on full display, things are starting to feel spooky. One thing you shouldn’t be afraid of this season is financing. Keeping your restaurants up to date with the latest equipment and technology can be challenging without the necessary cash to protect your bottom line. Your fear of financing may be lessened by understanding what factors lenders consider when making a credit decision. Review five of the most important factors lenders are interested in and put your mind at ease before deciding to apply. 


1. Your Brand – The brand of your restaurants can have a large impact on your application for financing. Key metrics for performance, such as Same Store Sales, average unit volumes, COGS & labor expenses and operating margins, and expected unit-level EBITDA will all be considered by lenders. Pay attention to how your restaurants perform when compared to these benchmarks. Are they above or below industry averages? These measurements provide context for lenders as they evaluate your business.


2. Ownership Profile and History – You are the responsible party for your business, so lenders will look at who you are as an owner when determining your creditworthiness. For example, they’ll look at whether you’re a financial buyer with operating partners or an existing owner/operator. They’ll be interested in the purpose of your restaurant financing as well as your short- and long-term growth objectives. They might also consider your operating infrastructure and whether it is sufficient enough for your restaurants to be successful.


3. Attrition – Red flags for a lender evaluating a franchisee can often include one of the two types of attrition. Orderly attrition means a controlled closure for strategic or financial reasons; disorderly attrition refers to an unintended closure caused by poor performance. While store closings aren’t always a bad sign for a franchise, a pattern of unplanned closures will likely cause concern for a lender.


4. Asset Quality – The quality of your stores is an aspect of your business you should be fully confident in before applying for financing. Lenders may take interest in the locations of your restaurants, considering for example whether they’re in highly trafficked areas or desirable neighborhoods. Quality considerations also might include how recently the stores have been renovated and how closely they match the standard for all restaurants of your franchise. Any future required renovations could impact the valuation of the enterprise and thus affect your financing application.


5. Sector Trends – Overall trends among various restaurant categories could impact your financing application. Lenders will look at which types of restaurants, like full service, quick service, fast casual, and snack are in growth mode, and which are in decline. Your brand will be evaluated in light of those trends, to determine if you are responding to, driving, or missing market changes and demands. Most lenders will consider portfolio performance over years or even decades to get a broad understanding of sector trends.


Applying for financing might seem frightening at first, but you can calm your fears by understanding the basic factors and criteria lenders are looking for. CIT is a trusted advisor to restaurant franchisees, and we make it our business to help customers get the financial products and services that will maximize their performance. If you are a franchisee seeking restaurant financing, avoid any financing terrors this fall by choosing an experienced lender that is committed to your future. Learn more about what CIT can offer you at cit.com/franchise.

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