A new age of financing

In this first instalment of a six-part thorough review of UK banking procedures and franchise lending, Gareth Samuel investigates how media and competitor-driven alterations in banking practice are set to alter franchise/creditor relationships forever.

Credit is the foundation of our society. Almost every building project, business venture, property and even possession in the UK will have, at some point in its lifespan, been invested in by a creditor. It is no surprise then that those great enablers – the banks – are under so much constant pressure to perform from the wider media, the Government and emerging competitors, as they spot a gap in the market. In the franchise world specifically, banks are the ultimate animators of ventures, directly determining the success of each unit and the industry as a whole.

2014 is set to be a big year for franchise banking, as these great financial behemoths seek to enhance their standing in this growing market. In addition, franchise brands are set to reap the benefits of increased simplicity regarding the funding application process and the attainment of finance for a new venture.

It is no secret (or myth) that banks love franchises. When new start-ups go to the banks for a loan, the respective Bank Manager has no way of knowing whether the business in question will be successful or not, as every figure, marketing ploy and return is purely theoretical. With a franchise however, a Bank Manager can see a business model, at least, has been successful countless times before and has the right people in place to assist a new franchise owner. Whether to lend or not to a proven franchise, therefore, becomes a much easier decision.

One vital cog in the financial mechanics, from a bank’s point of view, is the role of the middlemen. Businesses, like Franchise Finance, have become instrumental for many franchises in enabling the successful launch of new franchise owners, by assisting in the creation and presentation of an approvable business plan. Chris Roberts, Director of Franchise Finance, has overseen hundreds of successful finance applications and is expertly placed to provide insight into what the future is likely to hold for franchises looking for bank funding. “In order to make profits, banks need to lend,” he explains. “They are aware that there is an increasing amount of competition from new lenders. There is also pressure on the banks from Government and the media. With an election looming this pressure will probably increase. I am expecting to see this year, some of the more stringent requirements that have crept into the banks’ lending policies, such as a need to have higher levels of debt servicing cover, will begin to be eased.”

Chris is acutely aware of every fluctuation in lending procedure and deals with banks on a daily basis. He continues: “I also know that, as we move further away from the recession, the ‘Franchise Bankers’ have a better chance of convincing their underwriters to take a more positive view than standard sector policy.”

These changes are likely to see the lending process become altogether freer and more efficient. Lloyds Bank has been a stalwart of franchise funding for many years and has continued to support brands throughout difficult economic times. Richard Holden of the Lloyds Bank franchise team says the bank is constantly evolving to become more customer-focused. “For many years, Lloyds Bank has had a dedicated team of Franchise Managers throughout the UK that have been trained with the support of the bfa,” he says. “The bank’s franchise department maintains a comprehensive database of assessment reports on the majority of franchise brands that operate in the UK and our managers and credit team have access to this information to help them when evaluating a lending proposition from a franchisee.

“We also monitor the trading performance of existing franchisees that bank with us so that our managers have up to date information about the brand and franchisee performance when they consider financial requests.”

Lloyds’ approval rate for business loans is extremely impressive and the bank has helped enable many franchise owners to become successful. Richard continues: “We have approved 80 per cent of all business loans and overdraft requests in the past year and we offer a one per cent interest rate reduction on selected finance to franchises through the Lloyds Bank Funding for Lending Scheme. Reducing the borrowing costs for small and medium-sized businesses is just one way we’re going further to help our customers.

“As part of our ongoing commitment to supporting UK franchises and improving customer relationships we have clearly defined our appeals process so our customer’s can ask for any lending decision to be reviewed if they feel that it has wrongly been declined.”

Another prominent bank, in both the high street and the franchise industry, is HSBC. Having pledged commitment to franchising for the long term, the bank is looking to build on already-strong performances in the market. Head of Franchising at HSBC, Cathryn Hayes, tells The Franchise Magazine: “HSBC remains ‘open for business’ as we have been throughout the economic downturn. Again this year, we have maintained our strong relationship with our credit underwriters to ensure that the right information and support is available for all franchise finance proposals. We work closely with franchisors to update the model information regularly to ensure the HSBC Business Managers are fully informed. We lent record levels to the franchise sector in 2013 following a previous record year in 2012 and are aiming to keep this up in 2014.”

However, NatWest’s Franchise Development Team Director, Mark Scott, explains NatWest’s practices, with regard to lending to franchise businesses, are to remain the same because they have been so successful in recent years: “Our process has remained constant for many years now and has worked well for us, as highlighted by our market-leading position. After the initial conversation, clients are introduced to one of our local managers to arrange a meeting and take forward their finance requirements.

“Franchisees need to provide us with a business plan and some information about themselves. Once received, this is assessed and a decision is made and conveyed to the franchisee. Any conditions are then completed before the franchisee can draw on the facilities and start their franchise business.” Other prominent banks in the franchise sector include The Royal Bank of Scotland (RBS), Metro and Barclays – all of which are expected to commit further to franchising in line with industry growth. As processes become more efficient, the writing of a concise, yet comprehensive business plan is likely to become more of an art form than a template-able practice – as it is, undoubtedly, for some today. The services of Franchise Finance are therefore set to become ever more indispensible. Chris Roberts, having developed personal relationships with bank managers and franchise development lenders over many years has seen dramatic changes in the lending process. He insists the most prominent change is how quickly banks altered their lending procedure during the economic recession. He explains: “For me the biggest change is the way that banks look in much more detail at the proposition before they agree to lend. For all but the smallest of borrowings, they want to see a detailed business plan with a full set of projections. They will want to see some evidence that the assumptions are realistic and that monthly repayments can still be met, even if actual sales are lower than expected and expenses higher.”

It is well known that banks have become somewhat more rigid in their approach to approving finance for business ventures.Despite the excellent relationship banks have with franchisors, the importance of personal financial history has become an issue for these towering financial institutions. Chris continues: “Over the last few years it has become the norm for the franchisee to have to demonstrate his or her understanding of the business plan at an interview with the Bank Manager. Also, their personal finances and credit rating is much more of an issue and is now a key part of the process. We (Franchise Finance) personally know the directors and franchise teams of all the bfa member banks and have and use a database of bank managers throughout the UK who understand franchising and are prepared to work hard on behalf of our clients. In short, we turn an often difficult process into a much easier and sometimes even cheaper one, thanks to our overall expertise.”

Each bank has a different identity, and indeed philosophy, towards lending, relationship building and financial support in the franchise industry. The ethos surrounding NatWest, as an organisation, is one of offering continual support to its clients. Mark Scott adds: “As the UK’s largest lender to SME’s, we are committed to supporting our customers in achieving their ambitions. We are committed to getting closer to our customers than ever to ensure our dedicated franchise managers know the sector and the challenges and opportunities faced by businesses. As well as working closely with industry bodies including The bfa and being accredited by Chartered Banker, our managers spend at least two days a year with businesses to get to know how they work and how best to support them as part of our ‘Working with You’ programme.” NatWest has developed a formidable reputation for quality support, throughout a business relationship with franchise owners they support, through schemes like this. For Lloyds, it is the personal approach to banking that attracts so many customers to utilise the bank’s services. Richard Holden continues: “At Lloyds Bank, we have local relationship managers and credit teams who can build a better understanding of a franchise business. It’s our managers that set us apart from our competition. We are absolutely committed to building long-term relationships with our customers to support them through their business life. Every business has unique needs. That’s why we offer a whole range of flexible lending solutions to suit our customers. We encourage and support enterprise and we offer franchisees business support and guidance every step of the way.” Lloyds conducts franchise seminars too at significant industry events such as franchise exhibitions – it is even the sponsor of the coveted Best Franchise Awards 2014, which has been praised widely for its criteria.

NatWest and RBS too are heavily involved in the sponsorship of key events – this year’s Encouraging Women Into Franchising (EWIF) Awards will be sponsored by NatWest. Both of the aforementioned banks too provide regular seminars on important issues for franchises with regard to finances. HSBC aims to build strong relationships with franchisors and maintain excellent communication with franchise owners. The bank is the titular sponsor of the HSBC Franchisee and Franchisor of the Year Awards, organised and presented by the bfa. The bank fully backs the work of the bfa in its regulation of the franchise industry.

Cathryn Hayes continues: “HSBC has a dedicated central franchise team of ten with extensive knowledge, understanding and expertise within the franchise industry.

“Members of HSBC’s franchise team regularly present at bfa and industry seminars, providing guidance on all aspects of franchising, as well as funding for franchisors and franchisees. We know that the best business banking isn’t just about money, but also about creating strong, supportive relationships with a flexible and consistent high-quality service. HSBC offers a wide range of business services tailored to the franchise sector and we work closely with our locally based managers throughout the country, ensuring a reliable and timely approach for franchise lending proposals.” In conclusion, it is evident that banking has evolved over the past decade so that franchise owners applying for a loan must have an intimate knowledge of the business plan they are presenting, positive personal finance records and clear projections of how they will repay any loan. HSBC and Lloyds along with other leading banks in the franchise industry have reacted to an increase in competition from new lenders, such as supermarkets entering the banking sector and the increase in crowd-funding popularity, by increasing the dedicated individual franchise managers to maintaining excellent business relationships. It seems the finance arm of the franchise industry is unanimous that the future of funding is through the forging of professional and lasting business relationships.