As a Dunkin’ Donuts franchisee, you have no doubt realized there is no shortage of lenders who want your business—badly. As a lender to the community of Dunkin’ franchisees, I’m certain you are regularly contacted by companies like ours and presented with various offers—some more compelling than others.
Because of Dunkin’s market strength, capital is easily accessible at rates that are better than competitive. But even though you have money available when you need it, you would be well served to remember the famous Latin saying, “caveat emptor,” which means, buyer beware. By taking a little time to separate the lender wheat from the chaff, you can sort through the various offers and feel confident you are getting the best available rates and terms.
Acquiring bragging rights for having negotiated a “great rate” with a lender is much easier than actually negotiating an economically “good deal” when it comes to financing franchise projects. This is in large part
because comparing financing rates is not as straightforward as many borrowers think it is.
People in the financing community know how important it is for borrowers to believe they’ve received the lowest rate possible. In fact, there is such a tremendous pressure on us to deliver a great rate in an effort to satisfy prospective borrowers and to compete with the myriad other lenders vying for your business, that some among us are willing to do so by simply modifying their definition of the word “rate.” It’s not really a new practice—in fact it’s age-old, but it is one worth considering each and every time you search for franchise project financing.
So why is this age-old practice so pervasive? Easy. Lenders gamble that you either don’t know how to calculate your rate accurately or that you just won’t even try. The problem for you, the borrower? Lenders generally wind up on the winning side of those odds.
Let’s just look at the most basic presumption borrowers make that allows lenders to get away with this. Borrowers presume that there is only one kind of rate. Naturally, when you ask a lender to answer the question, “What’s your rate?” they answer by quoting an accurate APR, or annual percentage rate. But, in many cases, the rates you are quoted are not true APRs and are not accurate by any particular universal standard. And you would be safe to bet that if you are looking at multiple offers, each rate was calculated differently.
Rather than enumerating all of the variables that actually go into calculating your true cost of financing (e.g., fees, interim rent charges, upfront payments, etc.), I suggest a much simpler approach which will get you to about the same place.
Believe it or not, all you really have to do is add up all of the cash leaving your wallet and ending up in the hands of your lender, then compare each offer. We like to quote this obvious rule:
All else being equal, the less cash you pay lenders for the use of their money, the better it is for you!
So, how can you be sure the rate you are quoted will actually cost you less than other offers might?
We have these simple steps you can follow:
STEP 1: Add up all nonrefundable upfront fees and any lease/loan termination fees.
STEP 2: Add up all advance payments.
STEP 3: Add up all of your remaining lease/loan payments.
STEP 4: Determine the expected residual payment owed to transfer ownership of financed equipment, etc. from the lessor to you when the term is up (for leases with purchase options).
STEP 5: Arrive at the total amount of cash you will pay over the life of the lease/loan by taking the sum of the results in STEP 1 through STEP 4.
STEP 6: Add up all moneys paid from lease/loan proceeds to equipment vendors, contractors, other third parties, and yourself in connection with the lease/loan.
STEP 7: Subtract the result from STEP 6 from the result from STEP 5.
This is your total cost of financing.
By stripping out the complicated and, in most cases, unnecessary time-value-of-money math from the comparisons to make the calculation much simpler, you are stripping out all of the “rate semantics,” which some might call tricks, from your financing proposals, you can immediately examine an apples-to-apples comparison of financing costs with a thorough accounting of the amount and timing of all fees before you commit.
So, the next time you are in the market for financing, give your lenders’ proposals a careful review. You may be surprised to find just how little correlation there is between the rates you are quoted and the actual amount of money that is leaving your wallet. Caveat emptor! •
Richard Henderson is a banking and finance industry veteran specializing in franchise financing. He is vice president of franchise finance at Direct Capital Corporation, a CIT Company, based in Portsmouth, NH.