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The vast majority of franchise investments are financed by loans. Whether you are an experienced franchise investor adding a new brand to your portfolio or an aspiring business owner preparing to open your first shop, if you are purchasing a franchise unit, there&rsquo;s a good chance you are going to look for third-party financing. 

Most investors expect to be vetted when applying for a loan. Banks and other lenders want a clear picture of the candidate&rsquo;s financial history and projections, business plans, professional experience and host of other factors before awarding a loan. 

What some investors don&rsquo;t know is just how heavily lenders weigh the health of the brand in their decision. Some lenders will rule out certain franchise brands as a matter of course,&nbsp;regardless of the financial standing of the investor. Those same lenders may leap at the opportunity to finance an investment in a high-rated brand even if the investor is seen as a riskier candidate.

Mike Rozman, the CEO and co-founder of<a href="http://www.boefly.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=how-franchise-lenders-choose-brands-2707440" target="_blank" rel="nofollow" style="text-decoration-line:none" target="_blank"> BoeFly</a>, an online marketplace that connects commercial investors with lenders, says that kind of brand-oriented lending &ldquo;has been bubbling up for a while.&rdquo;

&ldquo;I think a lot of lenders are thinking more programmatically,&rdquo; Rozman said. &ldquo;They want to evaluate a franchise brand, rather than the investor, and get comfortable with the system as a whole. Once lenders are comfortable with a concept or brand, they start lending within that brand or concept.&rdquo;

Many lenders maintain lists of brands that they will finance. If a candidate wants to invest in a brand that isn&rsquo;t on the list, the lender won&rsquo;t even consider the proposal, according Erik Herrmann, Managing Director and Head of Restaurant Investment Group for<a href="http://www.capitalspring.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=how-franchise-lenders-choose-brands-2707440" target="_blank" rel="nofollow" style="text-decoration-line:none" target="_blank"> CapitalSpring</a>, a restaurant-focused investment group.

&ldquo;What you often find with a lot of the more conventional lenders in the market is that most of them kind of live and die by brand lists,&rdquo; Herrmann said. &ldquo;So bigger banks may only be able to lend into five or 10 brands depending on their screening protocols. If you are a franchisee operating in a system that&rsquo;s not on that list, you may have challenges accessing the capital you need.&rdquo;

According to Craig T. Weichmann, Vice President of<a href="http://www.pincomcap.com/?utm_source=1851franchise.com&utm_medium=article&utm_campaign=how-franchise-lenders-choose-brands-2707440" target="_blank" rel="nofollow" style="text-decoration-line:none" target="_blank"> Pinnacle Commercial Capital</a>, much of the selection process for those brand lists comes down to size.

&ldquo;Generally speaking, there are three tiers of franchise brands, which depend largely on the size of the brand,&rdquo; Weichmann said. &ldquo;From a lender&rsquo;s perspective, size is traditionally seen as very important. The biggest banks typically focus on the largest, tier-one brands. Right now, at the top of the heap is Taco Bell. That&rsquo;s a premier loan that every brand clamors to get a shot at.&rdquo;

But that strict adherence to brand lists by larger banks provides potentially lucrative openings for brands who are less dogmatic in their approach.

Weichmann points to a shakeup in brand ratings this year when Nation&rsquo;s Restaurant News ranked Domino&rsquo;s above Pizza Hut in its<a href="https://www.nrn.com/top-200-restaurants/2018-top-200-countdown-no-50-no-1?utm_source=1851franchise.com&utm_medium=article&utm_campaign=how-franchise-lenders-choose-brands-2707440" target="_blank" rel="nofollow" style="text-decoration-line:none" target="_blank"> annual Top 200 report</a> for the first time. Where many banks saw Pizza Hut&rsquo;s slip as a reason to stop financing deals with that brand, Weichmann says Pinnacle Commercial Capital saw an opportunity to pick up valuable deals that others are ignoring.

&ldquo;There have been some warning signs that Pizza Hut was slipping for a while, and now banks are wondering if they should be financing Pizza Hut deals,&quot; he said.&nbsp;&quot;But those rankings can represent superficial slips, so if we have an investor who wants to purchase a block of Pizza Huts, we&rsquo;re not going to rule it out.&nbsp;We want to learn more about who the franchisee is, what kind of game plan they have and if they are cutting the appropriate deal with the brand.&rdquo;

Franchise investors looking for a loan to invest in a smaller-name brand are by no means out of luck, they just have to dig a little deeper. Many lenders specialize in certain industries and segments, and those companies are likely to be more interested in the quality of the deal than the brand&rsquo;s ranking against other franchises.

CapitalSpring, for instance, is &ldquo;not so much in the business of picking brands that we want to be in,&rdquo; Herrmann said. &ldquo;We invest only in the restaurant space. We&rsquo;ve invested in 50 different brands and thousands of restaurants over the past 13 years. So we know the space. We&rsquo;ve seen every angle of it. We have encountered all of the challenges that our franchisee partners are likely to face. We have a strategic perspective that other lenders don&rsquo;t have. Compare that to a conventional lender operating across multiple industries, and it&rsquo;s just a completely different level of engagement.&rdquo;

As larger lending institutions continue to work within established brand lists, loans for top-rated brands are increasingly the easiest to secure. For now, franchise investors working with smaller or lower-rated brands will likely have to find institutions more explicitly aligned with their segment.

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