Getting a loan to start up a franchise business can be difficult, even during the best of times.
It can be almost impossible after a financial meltdown like the one that triggered the Great Recession.
And that doesn’t bode well for franchise companies, such as Vancouver-based Papa Murphy’s International, which profits by relying on a steady stream of start-up entrepreneurs to add to its 1,300-store chain of take-and-bake pizza shops.
The franchise model spurs additional startups, which add to the company’s exposure.
But the cycle gets bogged down and broken without access to startup capital in the form of loans that typically run between $250,000 and $275,000 to cover the costs of the pizza store startups.
That’s why Papa Murphy’s has teamed up with a new financial partner to finance its franchisees, according to Kevin King of Papa Murphy’s International, which has about 530 different franchisee store owners.
Papa Murphy’s $7.5 million credit program, created by Franchise America Finance and The Bancorp Bank, is expected to supply loans for at least 100 new stores in 2013.
Benefits of the lending program include competitive rates and less wait time — lenders issue a response within seven days and can close on the loan in as little as four weeks.
King said the program gives Papa Murphy’s a leg up with prospective franchise operators, a population that typically swells following a period of high unemployment.
“We’re trying to utilize financing as a competitive advantage over the other franchise companies the prospects could be looking at,” he said.
Before arranging for the financing program, Papa Murphy’s International’s prospective franchisees were on their own in securing financing. That wasn’t a problem for qualified applicants before the financial meltdown and recession that saddled U.S. banks with unparalleled levels of nonperforming loans.
“Banks are extremely diligent today,” King said.
He said business loan applicants today face far lengthier wait times for lending than before the recession.
“It might have only taken a week or two to hear back before 2008, and then another three or four weeks to close,” King said.
Securing the same kind of loan today can take up to four months, which bogs down the franchisee’s ability to secure a store site and move forward with negotiating a lease.
“It’s not good for any of the parties,” King said.
He said Papa Murphy’s hopes to make up for a slowdown in franchise growth.
The company added at least 90 stores in 2008, 2009, and 2010, then dropped to about 60 new franchise stores in 2011 and went back up to about 80 new stores in 2012.
Papa Murphy’s International is a private company that operates stores in 37 states and in Canada. The company took in sales of $702 million in 2011.