Franchise Debt: An Opportunity For Attractive Fixed-Income Returns

Franchise Debt: An Opportunity For Attractive Fixed-Income Returns

Because of regulatory changes due to the JOBS Act and advancements in technology, franchise debt is becoming widely accessible to individual and institutional investors for the first time.

Attractive fixed-income returns are always in demand, but now advisors have a new opportunity to place capital in high-quality franchise debt that delivers high single-digit to low double-digit returns.

Franchise loans are made to small business entrepreneurs working with established franchise brands.  Because of regulatory changes due to the JOBS Act and advancements in technology, franchise debt is becoming widely accessible to individual and institutional investors for the first time.

 

Franchises Are A Proven Business Model

Franchise loans have a strong investment thesis.  Unlike start-ups, franchises benefit from a proven business model that has succeeded in all kinds of economic conditions and geographic markets.

Regional and national franchise brands have high incentive to see their franchisees succeed. They offer pre-market, go-to-market and ongoing support to franchisees. That includes site selection and negotiation, customer acquisition, launch planning, and continuing marketing and operational support.

 

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5 Reasons To Invest in Franchise Debt

1. Franchise debt offers attractive return potential.

Investors can earn stable, high single-digit to low double-digit returns that are better than the performance delivered by many traditional fixed-income securities. Few fixed-income opportunities offer such appealing, risk-adjusted returns.

2. Franchise debt of top-tier brands has a history of quality.

The industry’s top franchisors have a demonstrable track record of ensuring the quality and creditworthiness of its franchisees. Independent businesses and start-ups simply don’t enjoy this advantage.  As a result, loans to franchisees from the best franchisors tend to be lower risk, particularly in comparison to loans or investments in other start-up businesses.  

3. Franchise debt offers broad diversification.

Franchise debt can fulfill two purposes of an investor’s portfolio, depending on the loan’s characteristics and the investor’s strategy. Franchise debt can be part of a fixed-income allocation or an alternative asset allocation. Franchise debt also offers broad diversification by geography, industry, brand, duration and risk, among other loan characteristics.

4. Franchise debt is transparent and easy to understand.

Franchise operations are straightforward and lack the complexity and uncertainty of more complicated and unproven business models. Franchise Disclosure Documents (FDDs) and Bank Credit Reports provide a level of transparency into franchise operating metrics. These documents are intended to give potential franchisees enough information to make educated decisions about an investment. Additionally, franchise financial reporting is done in accordance with the auditing and compliance requirements of the franchisor.

5. Franchise debt is an investment in entrepreneurship and the American Dream.

Franchise loans enable investors to support entrepreneurship and fuel economic growth and jobs in local communities. Franchisees are hard-working entrepreneurs interested in building a business and a better life for themselves. 

 

 

Denise Thomas is CEO of ApplePie Capital, a marketplace lender solely dedicated to the franchise industry.

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