IFA summit examines ways for operators to obtain credit, create jobsIFA summit examines ways for operators to obtain credit, create jobs

Robin Lee Allen

Businesses need money to grow, and banks say they want to share their reserves, but the lending spigot, which has been turned off since the financial meltdown of 2008, remains stuck in the closed position.


That point was underscored during the Small Business Lending Summit held here in April. Sponsored by the International Franchise Association, or IFA, the gathering brought together 200 business owners, lenders and policymakers to discuss an impasse that remains frustrating for many and prompted the formation of a Small Business Lending Group intended to ease friction among the interested stakeholders.


“Increasing credit flow to fuel the job-creating power of small business franchising is our No. 1 priority,” said Stephen J. Caldeira, IFA president and chief executive. 



The crunch is real


In a survey conducted for IFA by research firm Frandata, 39 percent of franchisors said more than half of their existing or prospective franchisees were unable to obtain financing. Also, the percentage of respondents claiming there had been improvements in access to credit in the past few months fell only slightly, from 65 percent in November 2010, to 60 percent in March.


In a separate analysis, Frandata estimated that $10.4 billion is needed to fuel necessary growth within the franchising sector, but that only $8 billion is currently available. That so-called $2.4 billion lending gap could further hamper the already slow economic recovery, IFA officials say.


And no growth means fewer jobs.


“As a resilient industry, franchising will still have a faster rate of growth than other industries,” said Jeff Rosensweig, associate professor of international business and finance at Emory University in Atlanta. “If credit is not available, 3 million jobs will be created through 2017. If credit is available, over 5 million jobs will be created by 2017.”


During discussions featuring more than 40 panelists, a picture emerged of two camps at a stalemate as lenders said they are eager to get more funding to businesses, but face higher regulatory hurdles and a more risk-averse mindset born of the financial crisis.


For their part, business owners spoke of too much government red tape and mountains of paperwork that still resulted in rejections from banks.


“I’m just going to wait to remodel,” said Bill Hall, an International Dairy Queen multiunit franchisee and chairman of the IFA’s credit access committee, who is also a banker and joked that he turned himself down for a loan. “That means I’m doing fine, but if I were to remodel my sales would go up, I’d create more jobs, and I’d hire a construction company.”


S.O.S. to franchisors


Several summit attendees noted that given the competition for financing, franchisors needed to do a better job of demonstrating to lenders that franchised businesses can promise lower risk than independent businesses.


Franchisors also must be more involved in building mutually beneficial relationships between franchisees and bankers, said Nigel Travis, chief executive of Canton, Mass.-based Dunkin’ Brands Inc., parent company of the Dunkin’ Donuts and Baskin-Robbins chains.


“We have relationships with regional and national banks, and we have an annual lenders summit,” Travis said. “We’re doing more road shows this year. Last year we met with 80 banks in five different cities.”


He said businesses could benefit from the sort of accreditation system used in Australia, and suggested that franchisors must have a “brutal” selection and training process for franchisees that is relayed to lenders.


Todd S. Jones, managing director of brand management and business development at GE Capital, Franchise Finance, noted that his firm planned to get $900 million to $1 billion to franchisees in 2011. While the systems can be as small as five units, they must demonstrate that same-store sales are up and that the business model can be profitable for franchisees, he explained. In addition, franchisees must have a voice in the franchise system, corporate management must be engaged, and the system has to be growing, with little volatility and few closures. 


Mark Luppi, executive vice president and head of business banking at HSBC Bank USA, N.A., and chair of the CBA Small Business Banking Committee, laid the groundwork for the new working group by sharing his key takeaways for all stakeholders in the issue:



Banks need to:


• Develop franchise programs and build relationships with franchisors, because there are both good and bad companies


• Create a screening process that brings in high-quality applicants that can generate revenue


• Leverage programs such as those available through the Small Business Administration that drive the desired risk profile


• Look at every option to get to “yes”


• Create an incentive program that drives their sales force to seek out opportunities


• Move faster on loan requests



Franchisors need to:


• Build relationships with the banks in their markets


• Create an introduction for their franchisees


• Illustrate what they do to support franchisees


• Invite banks to discovery days and highlight their franchisee selection process


• Communicate their brand support and offer solutions for when liquidation is necessary.


Contact Robin Lee Allen at [email protected].