Overlooked Financial Resource Supports Emerging Markets
Franchising World,August 2007
The migration south continues. Not the snowbirds heading for coastal winter havens, but America’s most treasured brands are popping up all across Central and South America. As economic growth in these emerging markets appeals to U.S. franchise systems, the financial risks in these same markets and the high costs of financing such risk can be a deterrent. Yet, U.S. franchises and their counterparts, the international franchisees, have yet to fully tap into the safe and flexible financing available through U.S. banks and the U.S. Export-Import Bank.
It’s no secret that emerging markets in Central America, South America and the Caribbean are experiencing rapid growth because of their high-return potentials. According to the latest International Monetary Fund figures, Latin American and Caribbean economies, which grew by an average 5.5 percent last year, will grow by 4.9 percent this year, and by 4.2 percent in 2008. The U.S. economy, on the other hand, has grown by only about 3 percent for each of the last several years.
Last year, the Dominican Republic’s economy grew by 10.7 percent, more than any other country in Latin America, realizing its best performance in more than 25 years. Much of this growth is attributed to the Central America Free Trade Agreement - Dominican Republic or CAFTA-DR. While predictions of economic growth are always accompanied by cautions about the region’s dependency on the world’s oil supply and the cost of other raw materials, it has at least chipped away at the region’s poverty rates. Whatever the causes, the result is a variety of new international markets to be explored by American businesses looking to plant roots outside of U.S. borders.
From the “50,000 foot” perspective, Central and South America may appear to be living the good life; however, the region is not necessarily totally home free. Liquidity that is flooding global markets is not necessarily as readily available or as cheap in the region. Financing is often difficult to obtain because these markets are still deemed “high risk.” High risk usually means high costs to borrow along with restrictive collateral terms. In addition, it is not unusual for U.S. suppliers that are being asked to ship merchandise to Latin American or other international markets to demand payment in full upfront.
Protecting the brand worldwide may translate into U.S. franchise companies requiring that a franchisee located south of the border must purchase their official headboards and mattresses, kitchen equipment or even cash register systems from the same U.S.-based suppliers. Whether it’s a quick-service restaurant, hotel chain or some other type of business, the franchise in a foreign country is often required to look and feel very much like their U.S. counterparts. Limited financing solutions can and do prevent or delay franchises from expanding in this region.
While these emerging markets are experiencing booming growth as populations increase and businesses dot the landscape, these markets have “illiquid” or “shallow” financial infrastructures. Translation: the local banking systems are underdeveloped, and, if banks do lend, they impose onerously-high interest rates, with very short terms and can be more than 100 percent collateralized. For instance, typical borrowing rates for a “good” company in Mexico may range between 9 percent and 18 percent with a maximum term of six months. Further, it is typical to require a lien on all of the company’s assets along with the owners’ personal guarantees.
In addition, these emerging markets are considered high risk by lenders in the United States because they do not have the same stringent types of credit-tracking systems. Credit reports or credit scoring from reputable sources are not readily available for businesses based in emerging markets, resulting in very little financing and borrowing histories.
Under-utilized Export-Import Bank Solution
The Ex-Im Bank’s primary goal is to benefit American businesses and create more U.S. jobs by encouraging increased exportation of U.S. goods and services to international markets. With that said, it is a valuable resource for both U.S. franchise companies and international franchisees.
The Ex-Im Bank is a unique and reliable source of financing support for both the U.S. franchisor and the international franchisee. It can ensure or guarantee the financing provided by lending intermediaries in the United States, enabling domestic companies, both large and small, to turn export opportunities into real sales that help maintain and create U.S. jobs and contribute to a stronger national economy. In turn, overseas importers and investors benefit from lower financing costs and more flexible financing structures than what may be available locally. Such Ex-Im Bank-supported financing for franchisees in emerging markets is an increasingly important tool in the U.S. franchisor’s arsenal.
Its Medium Term Financing Program supports authorized lending intermediaries (including U.S. and even foreign commercial banks) in extending attractive credit to importers in emerging markets that are purchasing equipment and services from American suppliers.
With nearly 70 years of experience, Ex-Im Bank has supported more than $400 billion of U.S. exports, primarily to developing markets worldwide. Its Medium Term Finance Program is the least expensive way for buyers in emerging markets to finance their purchases of goods and services from the United States. Medium term refers to the term of three to five years to pay back the debt. Other details of the program generally include:
• Up to five-year financing with semi-annual repayments,
• Option of fixed or variable interest rate,
• No local bank credit or guarantees needed,
• No liens on equipment needed and,
• The supplier/exporter gets cash on shipment, progress payments, and a letter of credit from the intermediary lender–non-recourse financing.
The types of purchases that are eligible under this program include:
• All types of equipment and services manufactured and sourced in the United States where the value of the U.S. content is at least 50 percent are eligible to participate,
• New or used equipment and,
• Multiple shipments from more than one supplier/exporter.
Primarily because of the amount of paperwork that is required to get Ex-Im Bank support, most intermediary lenders have a minimum amount they will consider financing. A typical minimum is $350,000, though smaller amounts are occasionally accommodated. Applications can be approved in as little as four weeks or as long as six months, depending on the completeness of financial information provided by the prospective franchisee.
Ex-Im Bank financing should be considered for those international franchisees who are required to purchase the equipment or supplies from U.S.-based companies. The U.S. supplier can ship product to the region and be reassured that payment will be made in full and without recourse. The required paperwork and documentation can be a little overwhelming at first glance. Those commercial banks that have demonstrated experience with the Medium Term Financing Program can easily help franchisors or franchisees to navigate borrowers quickly and easily through the various requirements.
Here are three examples of successful franchisees that obtained Ex-Im Bank-supported loans and used them to grow their franchises.
Quick-Service Food Chain in Monterrey, Mexico
In 2002, an established Mexican franchisee of a U.S. quick-service franchise system sought an Ex-Im Bank-supported loan to support expansion of the franchise while purchasing equipment in the United States as stipulated by the franchise system’s guidelines. Following several meetings, the lending bank determined that the Mexican franchisee had suitable creditworthiness and arranged for the first of three medium-term financings.
The first financing was an $860,000, five-year loan, paid out to several U.S. franchisor-designated suppliers of restaurant equipment. Additional restaurant expansion required a second medium-term loan of $730,000 a year later. In 2005, the franchisee embarked on another expansion, purchasing another “highly regarded” U.S.-based restaurant franchise with the help of a $966,000 medium-term loan.
Hotel Chain in Monterrey, Mexico
Also in 2002, a real estate development group in Monterrey sought and received a five-year, $981,000 loan with Ex-Im Bank support for the purchase of materials needed for the completion of a hotel franchisee. The real estate developer needed to purchase everything from light fixtures to elevators from U.S. suppliers as designated by the famous U.S.-based hotel franchise system.
Over the next several years, the real estate developer again sought Ex-Im Bank-supported financing for several other projects in Monterrey, including a major shopping center.
Fast Food Chain in El Salvador
In 2003, an El Salvadoran franchisee of a U.S. quick-service food franchise company sought an Ex-Im Bank-supported loan to expand one of its restaurants. As with the previous example, the franchisee had to purchase specific kitchen and playground equipment from approved U.S. suppliers to complete the expansion. Within three months, a $390,000, five-year loan was approved and the El Salvador franchisee was able to import the franchisor-designated equipment, with the lending bank paying the U.S. suppliers at shipment.
One final suggestion before a franchise firm or franchisee dives in: select a bank with a multilingual staff. Language barriers can be eliminated by using a commercial bank with experienced bankers who are fluent in the language of your franchisee. The banker will make direct and immediate contact with the borrower to discuss an attractive financing package through the Ex-Im Bank. In addition, the banker should also keep the U.S. franchise company informed about the progress in arranging financing; the franchise organization is free to focus on closing the technical aspects of the sale, knowing that the financing is in good hands.
The growing economies of the emerging markets in Central and South America should appeal to U.S. franchise companies. Expansion should not be hindered by the uncertainties or costs of securing local financing. With a knowledge and understanding of the medium-term financing available through the U.S. Ex-Im Bank, franchise systems can introduce this low-cost financing as part of their discussions with potential international franchisees. If there is local interest and desire in operating a franchised business in a growing economy in this region, take advantage of the U.S. Ex-Im Bank to seal the deal.
Alan Andrews is a vice president and manager of PNC’s Global Trade and Equipment Finance Group, part of the PNC Financial Services Group. He can be reached at 412-768-7662 or