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Capital Idea: Franchisor and Lender Team Up for Loans

In this of tight and uncertain franchisee financing, savvy franchisors are working hard to provide more options for finding startup capital for new franchisees and growth capital for existing franchisees.

In October, Hurricane Wings & Grill announced an agreement with Mount Pleasant Capital to make available $10 million in financing for new and existing franchisees. The new financing will provide new franchisees with up to 75 percent of the funds necessary to open their location, and up to 85 percent for existing franchisees to grow or remodel.

"Our goal was to add one more program to things we already were doing to assist our franchisees," said Mike Lubitz, CFO at Hurricane Grill & Wings in West Palm Beach, Fla. "It's the most recent addition to a war chest of for franchisees to finance and grow their business."

A unique feature of this program is how the franchisor and lender are working together - not only to vet applicants, but also to enforce brand standards and step in together if a franchisee is struggling to meet their payment. In other words, the lender and franchisor are sharing the financial risks and have worked together to establish lending criteria.

"It gives both parties more flexibility than a traditional banking relationship," says Lubitz. "What we're trying to accomplish is a much more mutually beneficial relationship with lenders."

And for the franchisee, he says, the arrangement provides easier access to capital, as well as an option to minimize any potential loss because the lender and the franchisor are working together to create and preserve value. "We all have skin in the game," says Lubitz.

While no franchisor wants a franchisee to struggle or fail and no lender wants a loan go bad, it is a fact of life in franchising. "We're providing a solution for a bad situation up front," says Lubitz. The arrangement, he says, provides maximum flexibility to keep a unit open, instead of fighting over it with the lender or other creditors. "Everybody wants to mitigate a potential loss."

In the case of a problem, the lender and franchisor will work jointly to resolve the problem. Options include the franchisor servicing or paying off or the loan and operating the unit and/or remarketing it. Hurricane will guarantee the first $500,000 of lender losses, limiting its downside risk; anything over that is the lender's responsibility, says Lubitz.

For a franchisee who becomes a defaulted borrower, this agreement also can minimize their downside by increasing the opportunity for a favorable recovery, providing the best possible deal for a venture gone bad. For the franchisor, this option can keep the unit open or allow for a graceful closing, maintaining the quality and reputation of the brand.

While this agreement should not be perceived as providing a lender of last resort, says Lubitz, it does provide a funding source for franchisees unable to find capital elsewhere and can provide an accelerated way to grow additional The interest rate is 10 percent and franchisees are free to refinance at any time if they're able to find better terms once the cash begins to flow.

According to a document from Bob Rodi, president of Mount Pleasant Capital, "this program is meant to be an additional 'risk mitigation' strategy, not a lender indemnification strategy."

"The purpose of this program," he wrote, "is not to have the franchisor repurchase defaulted loans. In fact, that is not what MPC hopes to achieve by operating under this agreement. MPC wants to work with those franchisors whose first priority is to preserve the equity in their respective brands by not allowing locations to close."

And, "Secondarily the idea behind this agreement is to create a loan process that is as seamless as possible.... We believe that franchisors that are willing to engineer these kinds of relationships will set themselves apart from their competitors, and on a going-forward basis build the strongest brands and franchise systems in the industry."

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