Bank Lending to Franchisees

Lending to would-be franchisees is difficult now, leading some franchisers to arrange credit for their franchisees, as reported in the New York Times.  This is going to lead some banks to re-think their stance toward franchisees.  Banks have become, in many cases, specialty lenders focused on real estate.

Loan Concentration
The real estate concentration poses three problems for banks:

  1. the concentration is inherently risk
  2. regulators hate high real estate concentrations
  3. banks have to put something on the asset side of the balance sheet, and there are few decent real estate lending opportunities

I predict that many banks will try to increase their commercial and industrial loans, and some of them will see franchisee lending as an opportunity.  And many of them will get slapped across the face in this sector.

There's nothing wrong with franchisee lending.  I would put it up for consideration by any bank trying to increase its C & I loans.  However, you have to know what you're doing.  Every lending niche, whether it's franchisees, finance companies, medical clinics, or whatever, has some particular practices that are necessary to reduce risk.  In the niches that I'm familiar with, it's not terribly difficult to understand good practices, but it does require a good bit of effort and diligence. (But it you are unwilling to be diligent about risk, what are you doing running a bank?)

The banks that acquire the knowledge necessary to make good franchisee credits will diversify their loan portfolio at a good margin.  The banks that go into the niche thinking that it's just like any other niche will have losses up the gazoo.