Once upon a time, lenders in America waved a magic wand and loan documents got approved automatically so that people could buy their franchises.

All kinds of people. . .all kinds of franchises. . .all kinds of loans.

No one asked too many questions - after all, both the lenders and the people loved franchising because it was successful - and with the paperwork completed, the credit rating verified, and the down payment collected, almost anyone could become a franchisee. Ah, those were the days, my friends. Franchisors tripped over themselves selling new franchises, franchisees lined up to buy dozens of different concepts from food to services to retail products. And the lenders smiled.

But then one day all the lenders woke up to discover that someone had locked up their loan documents. They were told that there would be no more loans, or very few loans, not even for franchises! And for many months thereafter lending ground to a halt. Franchisors despaired. New franchisees, and even established franchisees, disappeared. And the lenders frowned.

Somewhere about here you’d expect to read that somehow everyone lived happily ever after. But, of course, you know that’s just in fairy tales. This is for real!

Not only did everyone not live happily ever after, everything changed!

They changed for the lenders, of course, but they also changed for franchisees and especially for franchisors. In fact, the greatest changes would impact franchisors perhaps forevermore. And that would be a good thing because it scrutinizes franchising at its core.

"One of the major changes in lending today," explained Ronald A. Feldman, CEO of Siegel Financial Group in Bala Cynwyd, Pa., "is that lenders are doing major due diligence on franchisors before lending money to their franchisees" or prospective franchisees. Franchisor reviews and ratings are now front-and-center on a lender’s desk. And if they’re not - because the franchisor didn’t put them there - loans will not be approved.

The focus in franchise lending today is mostly on the franchisor, and it’s the franchisor’s responsibility - not the lender’s - to educate the lender so that a worthy franchise prospect can be awarded a loan.

So what’s a franchisor to do? And what’s a franchisee to do? Feldman, along with Darrel Johnson, CEO, FRANdata in Arlington, Va., has the answers for both.

If you’re a franchisor, there are four steps you need to take to help your prospective franchisees and existing franchisees get financed. Prospective franchisees: Pay attention. If the franchisor of your choice hasn’t made these moves, you’re better off finding another franchisor.

1. Get your franchise listed on the U.S. Small Business Administration’s (SBA) The Franchise Registry (www.franchiseregistry.com). Currently, there are about 1,000 franchise brands on The Franchise Registry. Even if you subtract the franchise concepts that are too small for financing, or can’t get approved for franchising, it’s an inadequate number. According to FRANdata, there are at least 3,000 active franchisors in the United States and another 4,000 inactive. "Franchisors need to be on that registry," said Feldman.

"The primary purpose of The Franchise Registry," explained Johnson, "is to streamline the review process for loans to be approved by the SBA. With 58 SBA district offices in the USA, it’s an insurmountable workload to expect SBA offices to review every franchisor’s franchise agreement to determine acceptability. However, no SBA loan guarantee will be honored until the SBA has reviewed and approved of the company’s franchise agreement. To expedite that process, and to review and approve once for all district offices, SBA came up with The Franchise Registry about ten years ago. Franchisors can submit their documentation with a $2,500 check (remember, this isn’t a fairy tale) and FRANdata, which the SBA tapped as the clearing house, will review the materials and make a recommendation to the SBA for or against approval. "Few franchisors are rejected," said Johnson. "Most of the objections that pop up can be resolved with an addendum to the franchise agreement."

To the franchisor who says, "I don’t want to do this; I don’t want to be on the SBA Franchise Registry," Johnson says, "You are severely limiting your franchisees’ access to capital in a capital constrained world because today many banks require that a brand be on the registry before they will provide an SBA loan. They do this because banks risk the SBA rejecting a franchise agreement if the guarantee is needed and the brand is not on the registry." In other words, prospective franchisees, if your franchisor of first choice doesn’t comply, find a second choice! Unless you can convince a community bank to finance your start-up you’re not going to get your deal funded. And the community bank presents a whole ‘nother set of challenges, which I’ll discuss in a moment.

As Johnson sees it, there are two important side benefits to The Franchise Registry. It’s a risk-reducing factor for lenders. They’re more inclined to say "Yes" when the franchisor is on the registry. It’s a marketing advantage for franchisors. "If they’re on the registry," explained Johnson, "they can legitimately tell their prospects that the SBA has deemed their opportunity acceptable, that they do not have an onerous franchise agreement, that it’s a normal agreement, and all of that is a good message for a prospective franchisee."

2. File an Item 19 in your franchise disclosure document. Until recently, Item 19 was known as an earning’s claim. Today it’s called a financial performance representation, and most franchisors refrain from including it in their Franchise Disclosure Documents (FDD), previously called a Uniform Franchise Offering Circular.

"Lenders are looking less favorably on franchise concepts that do not provide an Item 19," said Feldman, previously a franchisee and well familiar with all things financial. His company arranges SBA and conventional loans, as well as real estate and equipment leasing. New regulations have made it easier for franchisors to file an Item 19 and the number of complying franchisors is increasing. Not too far in the distance, lenders will suspect that if a franchisor doesn’t provide an Item 19 they’re hiding something about the financial performance of their franchise!

3. Understand that the Franchise Disclosure Document is not a banker’s diligence tool. "The FDD is written by attorneys to disclose risk. It’s not the franchisor’s ally at the banks," explained Feldman. "Franchisors should utilize a Bank Credit Report (BCR) or a similar tool, like a stock analyst’s report, that will help the lender understand the FDD." The Bank Credit Report is a proprietary product of FRANdata, at a cost of $2,900. Feldman offers his clients a similar tool, the Strategic FDD Expansion (SFE), which he points out is prepared by a loan packager.

Effectively, these tools do the underwriting for the banks and that’s why they’re valuable. "We package the report in a way that it fits into a lender’s credit report," continued Johnson. In an economy where money is tight, and when banks aren’t approving many loans, an underwriting tool becomes extremely valuable to the lender. "If the lender can’t get comfortable with the deal," said Feldman, "there’s no change of getting the loan approved." Franchisors are mistaken if they believe the FDD is the best tool for a franchise borrower to carry to a lender. Most of the lenders have never read an FDD!

4. Read the Franchise Disclosure Document as if you were a banker. "And then decide if you would lend money to your brand," said Feldman. "If your answer is ‘no’ then obviously you’ve got to deal with some issues."

Of course, if you’re not a banker, it’s difficult to pretend you are one because bankers seem to have their own secretive society that most franchisors can’t understand. Fortunately, Johnson was a banker! Which makes him an ideal candidate to advise a franchisor. However, there are so many conditions that could negate a loan’s approval that it’s just about impossible for the franchisor to know how to package a presentation for lenders.