It is difficult to get a small-business loan without pledging substantial collateral. Although lenders will look at your cash flow and other financial ratios first, they consider collateral to be the secondary way to get paid if you default.
Mature businesses with a track record of cash flow and a strong banking relationship are sometimes exceptions to lenders requiring collateral. But if collateral is required, real estate is preferred and it is usually discounted at 80 percent of its resale worth. Softer collateral such as fixtures, furnishings and equipment, and single-purpose commercial buildings, get deeper haircuts, or may be unsuitable collateral for some lenders.
Examples of single-purpose buildings include bowling centers and movie theaters, because only similar businesses can move into the buildings without costly renovations. In the event of default by the original users, the new occupants would likely tear out the bowling lanes or level the floors of a movie theater.
Restaurants and fast-food franchises also often occupy single-purpose buildings. Customizing the inside and outside is part of their branding. But in the event of default, it is likely that a new, more traditional retail store would remove facades with golden arches, tubs of chicken or overly customized interiors and elaborate kitchens. So prudent lenders will further discount the collateral by the amount of that renovation cost.
“One of the biggest start-up costs for franchisees is store build-outs,” according to an article in “Franchise Times.”
“One challenge for both franchisors and franchisees is walking a fine line between cutting costs while not cutting corners that will negatively impact the brand.”
In other words, the brand determines how much cost is added to a plain vanilla building so that the store is consistent with its others nationwide. Franchisors want Wendy’s patrons from Massachusetts to easily spot their brand while vacationing in Bradenton or Port Charlotte.