Franchising Challenges & Potential Growth

Chad Moutray

When you speak with small business owners, many of them will tell you that access to credit remains a challenge.  A recent survey from the International Franchise Association (IFA) found that 39 percent of franchisors reported that at least half of their franchisees had been unable to obtain necessary funding, either to open a new franchise or to expand a new one.  In addition, FRANdata has estimated that lending demand will outstrip supply this year, resulting in a $2 billion credit gap and restricting the industry's ability to grow.  With over 9 million employees and a sizable footprint in the national and global economy, franchisors and franchisees are poised for rapid growth moving forward, helping to provide new employment and output if only they have sufficient resources and a positive business environment.  This is the basic argument presented in an IFA white paper released on April 7 which I co-wrote.

With access to capital being the number one issue for its members, IFA hosted a Small Business Lending Summit in Washington, DC.  By bringing together franchised business leaders, lenders, regulators, and policymakers, the goal was to identify challenges and possible solutions moving forward.  One example put forward at the summit was to help standardize the process by which lending might flow to franchisees.  As IFA President Steve Caldeira and I wrote in The Hill's Congress blog, "... we and our bank partners hope to establish a franchise registry that would streamline loan approvals and provide a pipeline of qualified borrowers, eager to be financed."  This would be similar to the SBA's franchise registry, but would not be limited to SBA guaranteed lending programs.  Mary Navarro, the Chair of the Consumer Bankers Association and a Senior Vice President at the Huntington National Bank, suggested that this might be helpful.

In terms of policymakers, a number of prominent leaders provided perspective on how government could be beneficial with credit challenges for franchises.  Sen. Mary Landrieu (D-LA) noted, "One thing that Americans are good at doing is entrepreneurship."  But, she added that "many great businesses are desperate for capital."  She chairs the Senate Small Business & Entrepreneurship Committee, and her goals for that committee include strengthening the core programs of the SBA and finding innovative ways to get banks lending again.

Sen. Landrieu was instrumental in the passage last year of the "Small Business Jobs Act of 2010" (P.L. 111-240), which established a $30 billion fund for community banks for lending to small businesses.  Don Graves, the Deputy Assistant Secretary at U.S. Treasury administering this fund (and the Executive Director of the President's Council on Jobs and Competitiveness), noted that nearly 800 community banks have signed up for this program.  (Others have suggested that the program has been less successful.)  He also touted Treasury's new lending program for state governments, which is helping their cash-strapped programs support loans to small firms.  For her part, SBA Administrator Karen Mills said that franchises are "a critical part of the small business fabric," and she discussed some of the initiatives over the past couple years that have benefitted franchise owners (e.g., up to 90 percent loan guarantee, higher loan limits up to $5 million, small business tax credits, etc.).  In fact, over 10 percent of SBA lending volume over the past two years has gone to franchisees. 

On the regulatory front, Bruce Josten, the Executive Vice President for Government Affairs at the U.S. Chamber of Commerce, gave a stark outlook regarding new rules coming from federal agencies over the next few years which will impact small and large businesses.  He also urged political leaders to solve the nation's long-term fiscal challenges which pose serious challenges to the country's economic outlook.  ("We need to change the public conversation from one in billions [of dollars] to one of trillions.")  To help ease concerns that banking regulators might inhibit lending to small businesses, Martin Gruenberg, the Vice Chairman of the FDIC Board of Directors (and a possible successor to Chairman Sheila Bair) said that FDIC has issued guidance to it's examiners to work with banks constructively and to not automatically reclassify a loan simply based on collateral value loss or a computer model.  A borrower's ability to pay is more important.  For its part, FDIC recently hosted its own small business lending forum, and it has established a hotline for small business owners.

In addition to the headline speakers, a number of lenders and franchise business owners discussed their experiences with obtaining capital.  Overall, there was a willingness on the part of all participants to work together to seek solutions, in addition to the registry idea discussed earlier.  As a tangible takeaway from the summit, IFA has created a working group that will continue to monitor progress and to seek collaborations to better provide franchisees and franchisors with the key resources they need for growth.  As the summit ended, Greg Clarkson, the Chairman of the National Association of Government Guaranteed Lenders (NAGGL) and an Executive Vice President at BBVA Compass, had committed to doing a survey of its lenders and the obstacles that they experience with lending to franchisees in partnership with FRANdata.  In addition, franchise businesses, for their part, were also committed to partnering with lenders and doing what they could to help mitigate risk, which should expedite lending.  Therefore, it appeared that the goal of starting a dialogue was successful.

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