Kermit Pattison writes in the New York Times that Mr. Tessier had owned a liquor store for nearly a decade. He had a good credit score and a solid track record as a businessman in central Georgia. He assumed lenders would be happy to help. “I went to several banks and they acted like they could do loans,” Mr. Tessier said. “But when it came down to it, it was ridiculous. Ultimately, the terms and conditions were just outrageous.”
So Mr. Tessier turned to another source of capital, his franchiser. He financed the $250,000 cost of opening his pizza restaurant though a leasing program established by Marco’s Pizza to help franchisees unable to obtain traditional loans. The case is one example of a trend that is rattling the chains of franchising: facing a $3.4 billion credit shortfall, franchisers are trying to spur growth by offering franchisees new financing approaches and incentives.
“When you talk to anybody in the franchising industry, financing is the No. 1 concern,” said Sean Fitzgerald, vice president for franchise development at Wireless Zone, a cellphone retailer that has introduced in-house financing programs to cover part of its franchise fee and opening costs. “And it’s not going to get better anytime soon.”
Chains are facing the worst credit squeeze since the franchise model boomed in the years after World War II. This year, the franchise industry is expected to seek $10.1 billion in capital, but banks are expected to lend only $6.7 billion, according to the International Franchise Association.
The big national companies that dominated franchise lending before the 2008 collapse have stopped or reduced financing. The remaining lenders — often local banks — have been more restrictive in their credit underwriting, and they have been demanding more collateral (like home equity), more cash liquidity, more experience in the industry and outside sources of income, like rental income or a working spouse.
“Banks have hit the reset button,” said Reginald Heard, president and chief executive of Bankers One Capital, a company in Danbury, Conn., that specializes in financing franchises. “They’re just holding onto capital and being conservative on how they approach new deals going forward. The franchisee who left I.B.M. and now wants to open a Dunkin’ Donuts or Subway, those deals are a lot more challenging to get done.”
Robert C. Seiwert, senior vice president of the American Bankers Association, said the tighter credit standards affected first-time franchisees in particular (especially those trying riskier ventures like restaurants). Beyond the concerns about lacking collateral, experience and cash flow, lenders are often wary of franchisees who are unable or unwilling to make a large equity investment in their business. And lenders are likely to be especially cautious with newer chains that lack a track record.
That is why the franchisers are getting involved, Mr. Seiwert said. “Financing for franchisees has always been tough,” he said. “But in today’s economy, it’s even tougher.”
Some franchisers have gone a step further and put their own balance sheets to work by creating captive financing programs, pooled credit support or leasing programs. Others have tried “credit enhancement” in which the franchiser guarantees part of a loan to encourage tight-fisted lenders to free capital. Some franchisers are submitting themselves to the bank credit report process — essentially getting their credit-risk language translated into banking terms — so that franchisees have a lender-friendly package ready to take to banks that might have never seen a loan application from a particular chain.
Besides financing, many franchises have also taken steps to help potential franchisees by reducing fees, waiving royalties or reducing square-footage requirements. Whatever the tactic, the motive is the same: playing a more active role in helping franchisees gain access to capital. “We had to get into the financing space to be able to deliver a solution to our franchisees,” said Peter Taunton, founder and chief executive of Snap Fitness, a national gym chain based in Chanhassen, Minn.
Read more at: New York Times