One of the most important issues in franchising these days is the difficulty of obtaining credit to develop new franchisees. As reported here and elsewhere in the franchise press, many franchisors have had a significant falloff in sales over the last two years or so because of the difficulty that their franchisees face in borrowing money to open units. In fact, a number of financing companies, including CIT in the New York area, have gone out of business or substantially reduced their lending in this field. The result is stunted growth for franchise systems.
Franchisors have started to take matters into their own hands. Lending by franchisors is on the rise. Last week, The New York Times reported a 3.4 billion dollar credit shortfall, between the 10.1 billion in capital the franchise industry needs and the 6.7 billion banks are expected to lend. As a result franchisors are getting involved. Some franchisors have determined that the only way to build out their franchise systems and continue their growth is to establish lending programs for their franchisees. Other franchisors have decided to provide other types of financial assistance. In some instances, franchisors guarantee bank loans to franchisees and other franchisors reduce royalties in the first year of the franchise relationship to assist franchisees in opening units. Hopefully, these initiatives will spur growth and replace some of the lost financing previously available in the industry.
Obviously, 3.4 billion dollars is an enormous gap to fill. We will keep you advised as to whether or not these franchisor initiatives are making a measurable difference in providing the needed capital.