Investigating the bank (2)

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Franchises are often financed with government guaranteed loan programs. The bankers, sales agents (aka “franchisor associates”) & franchisors have a very organized way of dealing with unsuspecting franchise investors.

In March 2006, the Ottawa Citizen newspaper published an article called: Mounties investigate ‘predatory lending’. This is the first public mention of a specific example of what I had defined to Industry Canada as Predatory Franchise Lending.

Mr. Oudovikine says his case shows how big banks, franchisors and franchise brokers team up to take advantage of franchisees, many of whom are recent immigrants like him.

“It’s predatory lending. (CIBC) didn’t do any of the due diligence they should have done,” says Mr. Oudovikine, who sent the Citizen e-mails confirming the RCMP investigation. An RCMP official said the police force doesn’t confirm or deny investigation.

The Ottawa Citizen has also published Bank springs another privacy leak on May 14, 2005.

Mr. McLeod said CIBC is also investigating the loan granted to Mr. Oudovikine to start the franchise. But he said it is standard practice to make such loans payable to the franchisor, and noted that bank loan documents make that clear.

But Country Style chief executive Patrick Gibbons said he’s never heard of such a practice. He was unaware of any dispute over Mr. Oudovikine’s loan.

“A loan agreement is business between the franchisee and the lending party, period,” he said.

Two bank drafts made payable to the franchisor of +$230,000 in loans plus +$80,000 owner’s equity but with no current account signing officer’s signature?

So it goes in franchising.

One Response to Investigating the bank (2)

  1. Carol Cross says:

    Apparently, the banks in the USA were making business loans on home equities for the purchase of franchises without doing any due diligence work on the franchisor if the franchise was visible in the economy and had a government UFOC. The home equity was excellent collateral that kept rising in value in most markets and there was little chance that the banks would ever lose anything on the loan.

    The sub-prime mortgage scandal in the US will no doubt spill over into some franchise financing and this apparently will make the banks and the lenders asess their risk assessment procedures on loans to buy franchises or to startup any small businesses.

    This may be very good news for prospective franchisees who will then get some protection from the increased due diligence done by banks and lenders on franchisors and the “real” failure rate of their franchisees. There is n article in the June-July issue of The Franchise Times that indicates that nore banks and lenders will look at the failure rate of franchisees, even in the transfer columns, and will not want exposure to those franchisors whose startup failure rates exceed 10%.

    In the past, the banks and lenders didn’t care about the failure rate of franchisees who took out loans on their home equity to finance the purchase of a franchise, but NOW there will be scrutiny because it is uncertain just how far home prices will fall in many of the real estate markets in the United States.

    Won’t this situation offer some protection for new prospects who are looking at franchising as a solution to a job and production of income? Before, in the recessions, there was NOT the black swan of the breaking of the housing bubble and bank failures occuring simultaneously with the recessions. Historically, franchising grows in the econmy as the job situation worsens. Will it be different this time?


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