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The State of Minority Franchise Funding

One expert talks about where it's been and where it's going.

Opinions expressed by Entrepreneur contributors are their own.

As recently as 10 years ago, banks didn't understand the added value of running name-brand franchises and were hesitant to loan money to small-business owners hoping to expand. While a large part of the franchise community has overcome this perception, women and minorities are still having trouble accessing capital.

Take, for example, corporate refranchising. The added liquidity helped many franchisees go from operating a few stores to 50 or more. But for minority franchisees, biases have kept them from being able to grow at the same rate.

To address this problem, New York City-based United Enterprise Fund (UEF) was created in 1999, not only to help minorities get franchise financing, but to bring a better financing structure to the industry.

The fund works with proven women and minority operators in the restaurant industry, acting as a partner and putting in $1 million to $3 million to help franchisees expand. "Most minority and women franchisees, while they may be successful operators and may on paper have a very impressive net worth, tend not to be liquid," says Jeffery Keys, managing partner with UEF. "They need to partner with someone who can actually cut a check for $2 million. That's the space UEF is in."

Obviously, funds like UEF can be beneficial only if franchisees know about them and, according to Keys, many women and minority franchisees simply don't. "In general, minorities don't have access to the same types of information or networks, and that lack of access means, even though many minority operators are more than [qualified to receive funding], we're not talking to each other. They don't know how to reach me," Keys says.

But it's not just that franchisees are suffering from a lack of information-lenders also need to be educated. "There's an education process [lenders] have to go through to understand that these businesses, by virtue of being located in a certain area or being owned by a certain ethnic group, [are] not more risky," Keys says.

According to Keys, franchise associations are an ideal place for lenders to get that education. "A number of minority associations are more than willing to help businesses and capital providers get over this perception barrier," he says. "Fortunately, minorities are taking it upon themselves to provide this education."

UEF is also taking an active role in changing perceptions. "Funds like UEF are leading by example. They're making these investments, helping dispel the stereotypes and breaking down the perceptions of risk," Keys says. "We hope that by making these investments and having these success stories, we'll attract other capital. In a way, funds like UEF are catalysts for bringing other funds into urban and minority areas, because they'll look at our success and say, 'This is great. We'd like to be in those markets and make those returns as well. Maybe it's not as risky as we thought.' Then maybe they'll be the providers of follow-up capital."