Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Franchisees Who Win at Refinancing High-Interest Debt
Transcript
- Lucas: So Luna, I keep coming back to a number that's been sitting in my head since I pulled it this morning. The average franchisee right now is carrying about 68 percent of their outstanding debt at rates above 9 percent, most of it locked in during the 2022 and 2023 spike. Luna: Ouch. And I'm guessing a lot of them just accepted that because they thought rates were going to keep climbing. Lucas: Exactly. And that's the trap. They signed at 11, 12 percent because that was the market, and they didn't revisit it. But the Fed's been cutting since late 2025, and by August 2026, the prime rate is down about 150 basis points from the peak. That's a huge window for anyone who hasn't refinanced yet. Luna: So let's talk about a concrete example. What does this actually look like in practice? Lucas: I was talking to a franchisee in Texas who runs three quick-service restaurants. He had about 1.2 million in equipment loans from a franchise-approved lender, and the blended rate on those was 11.5 percent. He was paying roughly 11,500 a month in interest alone. Luna: That's brutal. And what changed? Why did he finally decide to refinance? Lucas: Three things. First, rates had dropped enough that he could get quotes below 8 percent. Second, his personal credit score had improved by about 40 points because he'd been making on-time payments for two years. And third, he'd built up equity in the real estate—he owned the land under one of his stores. Luna: So that equity became leverage. Literally. Lucas: Right. He went to a regional bank that specialized in franchise lending and refinanced the whole thing at a fixed 6.8 percent. That cut his annual interest expense by about 38,000 dollars. That's not a rounding error—that's a part-time manager's salary. Luna: And what did he do with that freed-up cash? Did he reinvest it or just pocket it? Lucas: He did a bit of both. He put half toward a new digital ordering system and the rest into a savings buffer. That buffer let him stop using credit cards for inventory, which was another high-interest drain. Luna: That's smart. So what are the key triggers that signal it's time to refi? I feel like a lot of franchisees just don't know when to pull the trigger. Lucas: First, the rate gap. If you can get a rate that's at least 150 basis points lower than what you're paying now, and you plan to hold the franchise for at least three more years, it's probably worth exploring. Second, your credit profile has improved—maybe you've paid down other debt or your business has grown. Third, you've built equity in real estate or equipment. That gives lenders more security, so they'll offer better terms. Luna: And what about the costs? Refinancing isn't free, right? There are closing costs, appraisals, all that. Lucas: Yeah, you've got to factor those in. Typical closing costs run 1 to 3 percent of the loan amount. So on a million-dollar loan, that's ten to thirty grand. You need to calculate your break-even point—how many months of interest savings it takes to cover those costs. If it's more than 18 months, it might not be worth it. Luna: So what's the first step for a franchisee who thinks they might benefit? Do they just call their current lender? Lucas: Honestly, your current lender is the last place to start. They have no incentive to lower your rate. You want to shop around. Look at SBA lenders, credit unions, and franchise-specific financiers. Get at least three quotes. And don't just look at the rate—compare the annual percentage rate, which includes fees, and check whether the loan has a prepayment penalty. Luna: Good point. And what about the SBA route? I know they have programs that can refinance existing debt, but the process is slower, right? Lucas: The SBA 7 loan can be used for refinancing, and it's a solid option because the rates are capped and the terms are long. But yes, the process can take 60 to 90 days. If you need speed, a credit union might close in 30 days. The trade-off is that SBA loans often have lower rates and longer amortization, which lowers your monthly payment. Luna: So it's a speed versus cost trade-off. Let's talk about prepayment penalties. How do you negotiate those? Lucas: Many franchise loans have a prepayment penalty that can be as high as 3 to 5 percent of the outstanding balance. That can eat into your savings. But there's room to negotiate. If you have a good payment history and you're refinancing with a different lender, ask the new lender to cover the penalty as part of the deal. Sometimes they'll do that to win your business. Luna: And what about variable-rate loans? Those are tempting because they start low, but they can bite you. Lucas: That's a big red flag. A variable-rate loan might start at 6 percent, but if the Fed reverses course and hikes rates, you're exposed. Unless you have a very high risk tolerance, I'd lock in a fixed rate right now. The market is pricing in more cuts, but nobody knows the future. A fixed rate gives you certainty for budgeting. Luna: So let's talk about timing. Why now? I mean, rates are still higher than they were back in 2021. Lucas: True, but they're not going to stay at these levels forever. The Fed has signaled they'll continue cutting into 2027, but the best deals are available to early movers. As rates drop, more franchisees will rush to refinance, and lenders will get pickier. Right now, you have less competition for the best terms. Luna: That's a great point. And it's not just about the rate—it's about the relationship. A good lender can offer more than just money. They can be a strategic partner for future growth. Lucas: Absolutely. And that brings me to something I want to mention, because it's been on my mind. We've been doing these shows for a while now, and we've talked about a lot of strategies. If even a fraction of what we've covered has helped you think differently about your business, that's a win. And the reason we can keep doing this, ad-free, is because a small group of listeners chip in monthly through buy me a coffee dot com slash fexingo. It's not a big ask—it's just what keeps the lights on. Luna: Yeah, and we really do appreciate it. We've had listeners tell us they've saved thousands from just one episode. That's why we keep doing this. Lucas: But let's get back to some practical tips. One thing I want to emphasize is that you should start the process early, even if you're not sure you'll go through with it. Get pre-approval from a couple of lenders, compare the numbers, and then decide. The cost of exploring is just your time. Luna: And what about the paperwork? I imagine it's a lot of financial statements, tax returns, that kind of thing. Lucas: It's manageable. You'll need your last two years of tax returns, a profit and loss statement, a balance sheet, and a list of current debt. Most lenders will also want a franchise agreement and proof of your franchise's health. If you have an accountant, they can pull all that together in a day. Luna: Let's talk about a common mistake. What do you see franchisees do wrong when they refinance? Lucas: The biggest one is extending the loan term just to lower the monthly payment. That can actually cost you more in total interest over the life of the loan. For example, if you have 10 years left on a loan and you refinance into a 20-year term, your monthly payment drops, but you'll be paying interest for twice as long. You need to compare the total cost, not just the monthly payment. Luna: So the goal is to lower the rate without resetting the clock too much. Makes sense. Lucas: Exactly. Ideally, you keep the same remaining term, or maybe even shorten it. If you can take a 15-year loan and refinance into a 10-year at a lower rate, your payment might stay similar, but you'll be debt-free five years sooner. Luna: What about using a refinance to consolidate multiple loans? A lot of franchisees have several small loans from different equipment vendors. Lucas: Consolidation is actually one of the smartest moves. It simplifies your finances, reduces the risk of missing a payment, and often gets you a better rate because you're dealing with one larger loan. The key is to make sure the new loan doesn't have a balloon payment or a variable rate that resets. Luna: Alright, so if someone wants to start today, what's the one thing they should do first? Lucas: Pull your most recent loan statements and check your current rates. Then do a quick calculation: if you could cut your rate by 200 basis points, how much would you save per year? That's your potential savings. If it's more than 10,000 dollars, it's definitely worth making some calls. Luna: That's a concrete starting point. And if they want to hear more, we've covered other financing topics in past episodes, like vendor financing and lease audits. Lucas: Right. And if you're a franchisee who's been sitting on high-interest debt, I'd say the math is in your favor right now. With rates dropping and competition among lenders heating up, there's never been a better time to at least check what's out there. Luna: And if you do refinance, come back and tell us how it went. We love hearing real stories from our listeners. Lucas: We do. And who knows, maybe we'll feature it in a future episode. Until then, do the math, make the calls, and see if you can unlock some cash flow. It might be easier than you think.