Franchisors Should Really Not Become Bankers

Posted by franpro under Franchises
From http://franchisebizdirectory.com 4146 days ago
Made Hot by: Small Business Bluesman on December 21, 2012 1:16 am

A franchisor is a franchisor. Period. A lender...is a lender. Period. Lenders lend. Franchisors sell franchises. They shouldn't be lending money to franchisees. Read why.

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Comments

Written by ShawnHessinger
4138 days ago

Joel,

It sounds like there's something left unsaid in this post. Why exactly is it a bad idea for a franchisor to provide financing? Is there an implication that franchisors that offer financing do so because no third party lender would provide loans for their business models? Also, while this is touched on in the post and then dismissed, I'm wondering, just to play devil's advocate, doesn't it make sense to provide financing as an added incentive at a time when getting loans from traditional lenders has become so tricky?

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Written by ShawnHessinger
4138 days ago

Thanks for the added insight, Joel!

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Written by franpro
4138 days ago

Hi Shawn,

Great questions.

Franchisors develop concepts and grow their business by using OPM. (Other people's money)

Those "people" need to prove that they're worthy. They need to come to the table with money.

If franchisors start becoming bankers, I fear that way too many people will get awarded franchises that maybe shouldn't have.

Especially ones who are borderline risks; not enough money stashed for working capital and living expenses. Maybe some of the less credit-worthy folks..

Etc. Etc.

Now, let's fast forward 9 months...maybe a year.

The franchisees that were awarded franchises that maybe shouldn't have been awarded them in the first place, and have gotten their financing directly from the franchisor, are now just about out of money. Maybe their franchise didn't ramp up as fast as they projected it would. Do they go to the franchisor for a ...credit line?

Now, let's go 3 years out. The franchisee almost broke even-except for the fact they he or she owes so much damn money to the franchisor.

And, the franchisor now OWNS THIS PERSON.

You take it from there, Shawn.

JL

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