Credit Access Is The Number One Issue Affecting Franchise Growth

Posted on June 27, 2011 by Melissa Lim

The mortgage crisis in our country caused some of the most devastating economic effects in recent history, with nearly every industry being affected by the economic downturn.  No industry, however, has perhaps felt the effects of the recession as much as the banking industry and because of this, the franchising industry.  There are plenty of theories about what exactly caused the economic collapse (including several books, blogs, podcasts and a couple of great documentaries), but it's clear that a major element was the lack of oversight for many banking and lending institutions.  As we as a nation begin to move through the stages of economic recovery, however, the main problem facing would-be small business and franchise owners is difficulty of obtaining credit and financing, due in part to a strong swing in the other direction for oversight and regulation.

Federal regulators have every reason to want to regulate banks more closely in the wake of the mortgage crisis, and now more than ever, banks are much less willing to lend out money without strong collateral.  This heavy regulation trickles down from the national level to the local banks and lending institutions, which cannot borrow money as easily from larger banks and thus cannot lend it out to small business owners.  The most frustrating part of the entire situation is that there is money available, but the regulations and documentation required to obtain funding has made the process slow to a crawl.

While franchise growth is not entirely dependent on readily available financing, Steve Caldeira (president of the International Franchise Association) at an IFA convention last month stated that, "there is likely to be a $2 billion shortfall in funding for franchisees in 2011".  This $2 billion accounts for an estimated 20% of the annual franchise funding and, according to Caldeira, will result in an estimated job creation shortfall of 80,000. 

Capital is a principal requirement of starting a business of any size, and low cash flow is one of the top reasons some small businesses and franchises ultimately fail.  This makes access to startup capital and lines of credit integral to a franchise, so how does one go about starting a new business if they can't get approved for credit?  Many franchisors have begun offering financial assistance programs for new franchisors that range from introductions and letters of recommendation to preferred lenders all the way up to franchisor loans and seed money for approved franchisees.  Recently, many franchise opportunities have emerged over the last few years aimed at the part-time job market.  These types of franchises typically involve direct-market products, low-overhead services or vending machines, and are designed to get the franchisee up and running with a small business for anywhere between $1,000-$10,000. 

Finally, if you have your heart set on opening that hotel or food franchise and can't secure the financing on your own; consider putting together your own group of investors.  This can look like a combination of friends or family, or can simply be a group of like-minded entrepreneurs in your area that want to start a franchise and that can all afford to chip in a portion of the required funds.  While this route doesn't exactly get you to the end result of solely owning your own business, having a successful business under your belt and the collateral of a building, equipment and liquid assets in your primary business will make getting the financing for your next endeavor much easier.