A dearth of available capital, despite the improving economy, is hampering franchise growth amid increased business demand, according to the International Franchise Association.
The industry trade group is part of a coalition, including the Consumer Bankers Association and commercial lender CIT Group, hosting the Small Business Lending Summit on April 7 at the Capital Hilton Hotel in the District. The event aims to bridge the disconnect through sessions highlighting the low-risk profile of franchising, best practices in loan underwriting and legislative policies that can aid small businesses.
Borrowers are having a hard time securing home equity loans, a traditional source of funding for franchisees, or putting up commercial assets as collateral in the face of depressed real estate values. Meanwhile, lenders say there is a paucity of credit-worthy applicants.
“Make no mistake about it, we have tightened up our standards on the bank side because of the economic downturn,” said Richard Hunt, president of the Consumer Bankers Association, who said his members are eager to find ways at the summit to support franchisees. “We want to make loans . . . people are just not as credit worthy as they were three years ago.”
John Reynolds, president of the IFA Educational Foundation, suggests lenders are often unaware of the attributes of franchising — performance history, scalability, brand strength — that mitigate risks and increase loan success rates.
“Banks are still operating in a highly risk averse climate, and anything that can be done to show them how many franchise businesses represent a lower risk profile will be good for . . . lenders, franchisers and franchisees,” he said.
A report released last month by FRANdata, an Arlington-based research company, estimated that available credit may be 20 percent below the $10.4 billion in new capital needed to meet the forecasted demand for franchise operations this year. That margin is an improvement from the 23 percent gap in 2010, a result, in part, to the increase in Small Business Administration loan guarantees.
“If we can unlock this credit freeze and get lending flowing to franchise businesses, we can have the same kind of robust recovery we’ve had leading out of past recessions,” said Reynolds.
Even with the bleak lending outlook, PricewaterhouseCoopers anticipates the addition of 19,079 franchise units this year, creating 194,000 new jobs and generating $33.3 billion in economic output — the gross value of the goods and services a business produces. The consulting firm attributes the projected growth largely to the $858 billion tax and unemployment benefits package, with its payroll tax rate cut.
Judging by the thousands of attendees registered for this past weekend’s annual International Franchise Expo at the Walter E. Washington Convention Center, Thomas Portesy, president of MFV Expositions, producers of the show, is convinced the industry is on an upswing. More than 200 exhibitors signed up for the show, up from 180 the previous year.
Of the exhibitors on display, more than 20 provided or advised on financing options. Portesy noted, however, “franchisers have solved some of the problems themselves: They’re doing some in-house financing, working with equipment manufacturers to lower costs.”
Edible Arrangements, for instance, offers a lease-to-buy program that only asks for 30 percent of start-up costs, while Dunkin Donuts has reduced some of its royalty fees to give franchisees a leg up.
Yogen Fruz, an exhibitor at the expo, does not provide seed money, but will guide entrepreneurs in finding funding. John Kane, a master franchiser for the Ontario-based frozen yogurt chain, said most franchisees he encounters are coming to the table with cash. Rustling up that kind of financing can be prohibitive for some small businesses, but Kane said it has not slowed the expansion of Yogen Fruz, which executed 14 franchise contracts last year.
One of those agreements will result in the fall opening of the first Yogen Fruz stores in Maryland, located in Westfield Annapolis Mall and Towson Town Center. Another will add two more locations in the District later this year. All told, the company has 1,200 locations in 25 countries, most of which are franchises.
Southern-style eatery Bojangles, another exhibitor at the expo, has recorded an annual 10 percent growth in units for the past three years, bringing its total franchise and company-owned stores to nearly 500. Just last week, the Charlotte, N.C., company turned on the lights at its first franchise restaurant in the District at Union Station. Five others are in Prince George’s County.
Eric Newman, executive vice president of Bojangles, said the company is focused on putting down roots in Northern Virginia, where it currently has no stores. There has been great interest from prospective franchisees, who he said have aggressively pursued the business format.
That’s exactly the kind of verve Kane believes will continue to drive the expansion of Yogen Fruz. People are eager to sign onto proven business models, he said. The trouble is, “there still hasn’t been the kind of lending that really spurred franchise growth in the past.”
douglasd@washpost.com
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