Women and Minorities Getting Rejected for Business Loans Is a Huge Problem. This Franchise Tried a New Training Program, and Now It Has a 100% Approval Rate for Diverse Franchisees. Here's how you can replicate their success.
Bedel Mbaya speaks six languages: English, Spanish, French, Swahili, Portuguese, and Lingala. But for some reason, he couldn't seem to communicate with bankers.
In early 2021, he was a 27-year-old carpenter with a history of hard work, and he needed $45,000 for a franchise fee with the trash-hauling company Junk Chuckers. He fulfilled all the requirements on paper for a loan, had the support of Junk Chuckers, and was dedicated to becoming an entrepreneur.
Yet at least four times, the banks rejected him. They gave no explanation, but he was pretty sure he knew their reasons.
"I thought it was my race and age," says Mbaya, who speaks with a Congolese accent. "I would try to speak slow, but what was going through my head was that they couldn't understand me."
In this, Mbaya was hardly alone. The IFA Foundation, which is the nonprofit partner of the International Franchise Association, describes this kind of problem as "omnipresent": Women, people of color, and prospective franchisees under the age of 30 all regularly struggle to gain access to capital. It's a common subject in franchising circles, and franchise leaders get an earful about it from lawmakers in Washington, D.C., particularly those who are members of the Congressional Black Caucus and live in primarily Black and Hispanic districts.
"They always say they're hearing from their constituents that they have a hard time getting capital," says Rikki Amos, executive director of the IFA Foundation.
All of which is why the IFA Foundation, as well as the founders of many franchise-related entities, are working on ways to solve this problem. Industrywide, many brands offer some way to support prospective franchisees from historically disadvantaged communities — with programs as varied as franchise accelerator programs at the University of Louisville and Howard University, both of which are sponsored by Yum! Brands, or more targeted programs such as the woman-centric initiative from Choice Hotels called "HERtels by Choice." (For more such programs, see our list on page 109.)
But as franchise leaders dig into the issue, they're discovering an important nuance: Although racism, sexism, and ageism certainly are a problem in some instances, they're not always the reason that franchisees from these communities are being rejected. The real problem, sometimes, is a gap in communication and resources.
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For example, Junk Chuckers has developed a program to bridge the communication gap — and now every single applicant it helped has been able to get a loan, regardless of gender, race, or age. That includes Mbaya, who today says he better understands the problem he faced.
The trick, he says, was that he had to add a seventh language to his repertoire: He had to learn to speak banker.
"There's a way to speak to businessmen," Mbaya says. "There are questions you should ask. If there's something you don't understand, you need to ask so you can understand exactly what is going on. I learned how to ask why I wasn't getting approved. What do I need to do to get approved?"
When Al and Shamairah Noufaro launched Junk Chuckers in 2018, they faced discrimination themselves. Al is of Indian descent, Shamairah is Trinidadian, and they felt routinely questioned and dismissed as they worked to set up their company.
Shamairah remembers trying to get a loan from one bank which she'd specifically selected because its marketing featured lots of women. This bank, she figured, would be especially supportive of her. "They asked for a business plan. I handed them a business plan," she recalls. "They asked for a cash flow statement, and I handed them a five-year cash flow statement. They wanted credit scores, and I had a perfect credit score. Then they would each ask in their own way, 'Where's your husband?'"
When the Noufaros started offering Junk Chuckers franchises in 2020, they intentionally sought out candidates who were people of color or female. They wanted to help people who had endured similar challenges. But instead of being able to happily onboard these new franchisees, they started hearing a nonstop series of horror stories. Their potential franchisees simply could not get loans.
The Noufaros eventually surveyed about 800 of their candidates. Al estimates that maybe 30% of cases "were blanket, classic discrimination by different forms of lenders, whether it was equipment leasing, financial institutions, insurance brokers, business consultants." In those cases, he would follow up personally with the lenders, as the franchisor. Then he'd hear stories that were even more infuriating. "One person had a family friend apply for a loan with the same exact parameters, and they got the loan," he says.
And the problem wasn't just happening in Canada, where the franchise company started. When Junk Chuckers began expanding into the United States after the start of the pandemic, the Noufaros saw the same thing happening to applicants seeking territories in Texas, Florida, and California.
There was Rahul Menon, who is 30, of Indian descent, and previously spent five years as a self-employed marketing consultant. Lenders would approve him, but would then try to raise the agreed-upon interest rate at signing time. There was Faraad Arfeen, a 26-year-old, first-generation Canadian whose parents immigrated from Guyana. Even with his bachelor's degree in business administration and background working in insurance, he, too, was rejected. "One banker actually said that they needed to protect their bank's best interest, and due to my age, they would need a lot more convincing to give me a loan," he says.
There was also Melissa Baxter, who's 40 and has a degree in business with a marketing concentration, and spent more than 15 years as a transportation dispatcher. "I felt like [bankers] were talking to me as if I was not educated, as if I didn't know what I was talking about," Baxter says.
These and other applicants all told the Noufaros that the banks had turned them down. The applicants felt not just disappointed, but also ashamed and dejected, as if something in the air around them would never let them open a franchise or own their own business. "One person said it's like carbon monoxide—it's a slow killer," Al says. "You don't see it, you won't even smell it, but it will kill you."
That's when the Noufaros decided: If they wanted a truly diverse pool of franchisees, they had to do more than simply court and support these people. They'd need to solve the banking problem themselves. In the roughly 30% of cases they identified, that would mean helping applicants overcome actual racism, sexism, and ageism.
But what, they wondered, was happening in the other 70% of cases?
As Al Noufaro spoke with his frustrated franchise applicants, he listened to stories about what actually happened at the banks. In some cases, lenders would ask why the applicants wanted to start their own businesses, and the applicants "would come up with some cookie-cutter response that they thought the lender wanted to hear, and so the lenders thought they weren't being honest," Al says. In other cases, the applicant would respond that there was a lack of Black entrepreneurs, so they wanted to become one. "The lender, who doesn't want to hear that, would say, 'I can't talk to this person.'"
Noufaro realized that in some cases, the bankers weren't necessarily being racist, ageist, or sexist. The applicants were just blowing the interview. They had to learn to be themselves, learn to answer numbers-based business questions, and basically get out of their own way.
"There was a culture gap," Al says. "They're saying this person wrote them off because of skin color or sexual preference, when it was actually a gap in language."
For example, Al started coaching younger applicants to answer the banks' standard questions, like this one: What do you see the business in five years? The applicants had been saying things like, "I see myself as a successful Black entrepreneur, one of the first ever in my family and community." But that answer doesn't address the banks' financial considerations. Lenders were looking for something more along the lines of, "In year one, I see 12% growth, which I will reinvest into these three key areas. Now let me tell you about year two…"
After spending about eight months digging into the problem, the Noufaros created what they call "culture gap training" in 2021. Now whenever a woman, younger applicant, or person of color is planning to seek a loan to buy a Junk Chuckers franchise, the Noufaros run them through a four-hour role-play exercise. The scenarios are direct, one-on-one, and sometimes a bit uncomfortable, just like interviews with a lender can be — all with the goal to help these applicants become less sensitive about topics of gender, age, and race, and to instead speak the language of business.
"With the women," he says by way of example, lenders "want to know what their role is: Are they managing operations? Is it field operations or back-end operations? That's where the bias comes in. They don't feel that women can handle the field operations without direct field experience. However, when a male applicant goes through, I don't ever encounter that problem about lack of direct field experience."
In this case, the culture gap training teaches female Junk Chuckers franchise applicants to anticipate that question — and, more importantly, to avoid a knee-jerk response of feeling rightly offended in the moment.
"We help them prepare to answer the clearly biased questions," Al says.
The Noufaros also teach candidates that if they feel flustered by what Shamairah calls "diversity PTSD," it's OK to give themselves a beat by saying, "I'm not sure I understand what you mean by that question. Could you be more specific?"
Once a franchisee went through the training, they'd get their loan approved within a week or two, Al says.
As the Noufaros grappled with this problem for their one franchise, the International Franchise Association was grappling with the same problem industrywide. The trade association was also familiar with applicants being rejected for loans and the culture-clash problems that were causing it. And just like Junk Chuckers, the IFA wanted to intervene.
"So many individuals coming from these backgrounds are going to be first-time business owners," says Amos, who runs the IFA's nonprofit partner, IFA Foundation. "They haven't seen somebody do it successfully before. They're blazing a trail for their family and their local community, and they go into the bank, and they don't know how to interview as successfully."
That's why, this June, the IFA Foundation launched two online educational programs — one for franchisors, one for franchisees — full of videos, guides, and other resources. They're designed not just to address the communication gap, but also to direct potential franchisees (and the franchisors who help them) toward different alternatives or lending institutions who have greater flexibility in lending options or are designed to serve underrepresented communities.
Related: Be Intentional About Diversity
For example, the IFA Foundation is putting a lot of emphasis on Community Development Financial Institutions, known as CDFIs. These are banks, credit unions, loan funds, microloan funds, and venture capital providers whose purpose is to promote neighborhood revitalization and economic development in low-income communities. That means the CDFIs are already alert to potential translation problems, and they're tasked with finding ways to resolve them instead of simply killing the deal.
"It struck us, talking to members, how few people are familiar with these resources," Amos says. "We want to make sure people know these things are out there."
There are about 1,000 CDFIs in the United States, according to the U.S. Department of the Treasury, and these institutions are actively seeking would-be franchisees like the ones Junk Chuckers and other franchisors keep seeing fail at traditional banks.
The IFA Foundation's podcasts and webinars about CDFIs explain, for instance, that the CDFIs can be much more flexible about applicants who are seeking smaller-size loans, which larger banks may not typically be able to underwrite. The applicants may not have the usual background that a larger bank would want, but CDFIs are more open in that regard, too.
That, Amos says, means the budding entrepreneur and the lender are in agreement about the big picture: "They're doing this to get money into the communities."
Franchising is an old industry — and old industries, regardless of their intentions, can get stuck in their old ways. The Noufaros feel like they've seen that up close: Some people "tend to have Old World expectations of who's doing the managing, of what kinds of language should be used." But they're heartened by the results of their own program, and by what they're seeing from the IFA. The industry can make real improvements by listening to and collaborating with progressive franchisors, they believe. Change is possible.
"I can't change anybody's perspective," he says, but "it's not all doom and gloom. We've shifted gears from our mindset about two years ago. It was a communications problem. Fix that, and the person has confidence. All of these beautiful things happen."
Other brands have taken their own approaches to help bridge the gap — sometimes by offering resources, and other times by offering help either securing financing or lessening the financial burden.
For example, Executive Image Building Services offers 50% financing of its franchise fee for BIPOC franchisees. Oxygen Yoga & Fitness helps identify what it calls "government and private grant and lending options geared toward the BIPOC community," which it then shares with new franchisees. Self Esteem Brands (which owns Anytime Fitness, Waxing the City, Basecamp Fitness, and The Bar Method) is currently building an initiative to bring financing to prospective business owners from underrepresented communities.
Other brands offer discounts on their franchise fees to certain groups of applicants, though who qualifies may vary by brand. Both Spherion Staffing & Recruiting and Wetzel's Pretzels offer a 25% discount, for example. The UPS Store offers approximately 50% off. And programs like these are growing or being launched all the time.
Now the Noufaros are inspired to think even bigger — about their own business and their own impact. They're creating a parent company called Chize to house three franchise brands: There's Junk Chuckers, of course. Then there's GentiCare, a home caregiving brand that was scheduled to launch in July. And finally, there's Neighborly Tutors, an academic tutoring brand that's scheduled to open in 2023. All will include culture gap training in their application process.
"It's a coaching-first franchise model, versus a royalty-first or some other kind of franchise model," Al says. "We know every brand wants to change the world, but we feel and hope that individuals will feel like we can help them. It's like boxing. It's a street sport, but if you give those kids coaching so they can focus mentally when they're in a fight, they can win. That's what we do."