We first noted in June of 2010 that the tightening credit environment was creating development difficulties for franchisors and franchisees. At that time, franchisors were beginning to step in to create credit opportunities for prospective franchisees.
With the national and global economy still in recession, the franchise industry is caught in the grips of a vise-like credit squeeze. According to the New York Times, the current credit crunch is the worst the industry has seen since the franchise model first caught on after World War II.
Where an individual with good credit would have once had the luxury of choosing from a large number of eager lenders, now a prospective franchise owner may be lucky to find one or two willing lenders-and often at very unattractive terms.
First-time franchisors have been hit the hardest, as banks are less willing to take risks on individuals without a proven track record. To make matters worse, first-time business owners are often less able than their more seasoned counterparts to make large up-front equity investments or provide suitable collateral.
However, with this bad news comes a silver lining: Faced with the widespread lack of available credit, many franchisors are looking for ways to sweeten the deal for potential franchisees by taking an active role in making funds available.
Some franchisors have gone so far as to join the financing business themselves, creating their own lending and leasing programs that cater directly to franchisees. Others have initiated “credit enhancement” plans in which the franchisor guarantees a portion of the loans that franchisees take out with third party lenders, thereby reducing the risk to the lending institution.
In addition to providing loans directly, some franchisors have taken other measures to make the start-up process more affordable. For instance, many franchisors have lowered or waived fees and royalties, or reduced costs by relaxing the physical requirement of the franchise site itself.
The New York Times recently profiled a couple of instances where franchisors are offering some form of lending or leasing assistance to potential franchisees.
One such example involves a prospective restaurateur who wished to open a Marco’s Pizza franchise. The man visited several banks to help secure a $250,000 loan for the franchise, but was either rejected or offered loan options with unattractive terms. Instead of giving up hope, the man found help through a leasing program offered by the pizza franchisor.
Marco’s Pizza chain understood all too well the roadblocks this man and other potential franchisees were encountering. To help, they created a few financing programs to assist new franchisees. Because of the financing opportunities offered through the pizza chain, the man was able to secure his $250,000 start-up costs and become a franchisee.
Sean Fitzgerald, vice president for franchise development at Wireless Zone-a cellphone company-also understands the predicaments potential franchisees face today. The Times reported that Wireless Zone currently provides financing to franchisee hopefuls to help with fees and start-up costs.
According to the International Franchise Association, a leader in franchising education and advocacy for over 50 years, franchisees are expected to seek over $10 billion in funding this year. However, banks and lending institutions are only expected to lend just over $6 billion.
Some New York franchise attorneys say that it’s likely more and more franchisors will be stepping in to fill that gap and lend a hand to help franchisees kick-start their operations.