Financing or refinancing a franchise loan is a very important and time-consuming process. What does this mean for a franchisee? If you have a brand that has performed well, it likely means that you will have multitudes of competition for your loans in this market. That’s the good news. The bad news is that the administration, due diligence and ongoing servicing of these loans is at never-before-seen levels. If you have several loans, you almost need a full-time CFO.
Hey, this is Rick Ormsby at Unbridled Capital. Today, I'd like to talk a little bit about financing and refinancing alone in the franchise business.
Over the last four or five years, the franchise space has seen a real increase in the number of lenders who are looking to place capital into franchisees and franchising businesses. Interest rates have remained really low and because of this, borrowers and especially franchise borrowers, now have lots of opportunity to shop their loans and look for lenders that offer the types of customized loans that might appeal most readily to them in their needs, whether they're looking to grow through acquisition, just maintain what they have and remodel their locations over time, or growth or new unit development.
Lenders are typically looking at franchise brands today in tiers and so you're going to hear tier one, tier two and tier three and your particular franchise drops in one of these tiers, based on its size and scale and profitability and performance, over the last four or five years. And what tier it's in, typically effectuates what lender is interested in it and what terms they're willing to offer.
If you are a borrower or a potential borrower, here's some things to consider. Interest rates are obviously at the forefront and they are typically fixed,, floating or a mixture of the two, depending on the size of the deal. You're going to hear things like LIBOR plus two to 400 basis points, which means that floating rate loans right now for tier one and tier two concepts are typically in the three to 5% range, depending on the brand itself.
You're going to hear a little bit about terms too, and depending on how big the loan is and what brand it is, most of the larger franchise loans are now five to seven year terms, necessitating the need to be able to refinance your business every five to seven years. We're in a slightly rising interest rate environment, so now's the time if you haven't done it, to consider doing just that.
We have covenants and so most lenders look at least adjusted leverage as their most critical term, to be able to look at that calculation and then they lend the total proceeds of their money against a business based on that. And we see covenants like pre and post distribution fixed charge coverage ratios, as well. You talk a lot about covenants and we also talk about personal guarantees and that's a component, whether you have a personal...