Lending incentives help boost economyLending incentives help boost economy

Sarah E. Lockyer

As this year’s presidential race heats up, the intersection of politics and business is once again emerging as a major focus of the national debate.


The economy is on a slow climb out of the recession, which many blame on failed policies in Washington, D.C. Lawmakers continue to discuss the possibility of introducing new Wall Street regulations. And both President Barack Obama and former Massachusetts Gov. Mitt Romney loudly cite Romney’s past experience with private-equity firm Bain Capital in an effort to make opposing points.


For the restaurant industry, politics and business intersect at several critical points — tax regulation, health care reform, menu labeling and immigration policies, to name just some. 


But financing and lending legislation — or regulation that can spur or stop access to capital — hits home with nearly every business.


“How Washington regulates lending ultimately goes to the lifeline of many, if not most, small businesses, especially franchises,” said Azim Saju, vice president of HDG Hotels, a management company and operator of seven hotels under Quality Inn, Hampton Inn and other brands. 


Franchisees typically are small-business operators, he noted, and need supporting capital to open locations, run operations and expand businesses. That support often comes from national lenders, local banks and federal programs like the U.S. Small Business Administration, or SBA. 


“When the support doors get shut,” Saju said, “it disincentivizes businesses from hiring and investing and impacts the economy’s ability to grow.”


Currently, banks and other lenders are under the watchful eye of Washington, which pegged the easy access to capital as one of the main drivers behind the 2008 financial crisis and ensuing recession. Banks are required to hold larger reserves, or the amount of capital against their risk, ultimately limiting lending options. In addition, some assets have been reclassified via regulators in Washington, affecting a bank’s flexibility.


“Policy makers can move the needle,” said Mike Rozman, co-president of BoeFly, an online marketplace that matches borrowers and lenders, particularly in the franchise market.


BoeFly recently partnered with the International Franchise Association to create the IFA/BoeFly Franchise Lending Index, which tracks franchise lending trends. The index collects data from BoeFly’s marketplace, including the number and sizes of transactions posted and closed, as well as data from the SBA on their lending levels. From March 2010 through March 2012, the latest available data, the index has hovered below its 100-point normalized value — except when Washington got involved through a stimulus package. 


Spikes are seen in August, October and December of 2010, the highest of which was the 20.5-percent surge in December, which brought the index to 114.2. Those increases were related directly to the enactment in 2009 of the American Recovery and Reinvestment Act, according to Rozman. The legislation aimed to stimulate the economy via encouraged lending and additional spending plans, and included changes to SBA lending regulations, from higher total loan availability and waived fees to increased levels of guarantees from the government. After loan demand was met, the lending index then fell back to its typical post-crisis state, with values percolating below 100.


In general, franchise financing has improved over the most recent 12-month period, with small fits and starts month by month. The index fell 0.5 percent in March to 93.8, but has increased 3.2 percent between March 2011 and March 2012. 


The index tracks lending trends starting in 2002, and the historical data clearly show levels above 100 for most of its lifespan, especially between the lending and merger-and-acquisition heydays of 2005 through 2007. A massive drop in the index in October 2008 is clear, when the financial markets imploded and the economy fell into a recession. 


“The experience of 2006 and 2007 was not real,” Jon Luther, nonexecutive chairman at Dunkin’ Brands and chair of Arby’s Restaurant Group, said during an April Small Business Lending Summit. “But I don’t think where we are now is real, either.”


Luther is also the IFA’s chairman. The summit, produced by the IFA and its partners, was a one-day conference aimed at connecting lenders with borrowers — and Washington regulators — to discuss trends and initiatives aimed at improving access to capital. Representatives from the Federal Deposit Insurance Corporation, SBA and U.S. Comptroller of the Currency attended.


“We need pro-growth policies,” Steve Caldeira, president and chief executive of the IFA, said. “We need to either eliminate or minimize the impact of regulations on access to capital.”


Sources said the trouble isn’t simply banks’ heightened requirements against liabilities or assets, nor changes to asset classes, but the combination of those policies with the already difficult environment in Washington when it comes to tax uncertainty and health care reform. Add to that general economic uncertainty around consumer confidence and spending, and the recipe is not one that promotes growth. 


“Regulators have to get more comfortable,” Dennis Jacobe, chief economist at Gallup, said. “A stronger economy will make everyone more comfortable.”


Contact Sarah E. Lockyer at [email protected].
Follow her on Twitter: @slockyerNRN.