Matthew Haller, 202-662-0770
NEW REPORT SHOWS SMALL BUSINESS LENDING TO FRANCHISES REACHES HIGHEST LEVEL SINCE RECESSION
However, Lending Levels Still Projected to Fall Short of Demand
WASHINGTON, April 9—According to new research released today, lending to America’s franchise businesses will reach its highest level since the recession, providing $23.9 billion in lending to support 59,300 unit transactions, yet will still fall short of demand the International Franchise Association announced today. The Small Business Lending Matrix & Analysis, Vol. 5, prepared for the IFA Educational Foundation by FRANdata, shows that in 2013, new and existing franchise units will create or maintain 797,700 jobs and generate $106 billion of annual economic output to the American economy.
“Franchise growth is inextricably linked to the availability of small business lending and we are pleased to see a positive trend in the availability of capital to existing and prospective franchisees,” said IFA President & CEO Steve Caldeira. “Franchising remains the most viable business model in the world to quickly grow and scale a business. The surge in lending to franchises since the recession reflects the continued popularity of franchising as a means for investors to go into business for themselves, but not by themselves. Many lenders often view franchising’s proven, structured and scalable business model as a lower risk profile due to the support many franchisors are offering franchisees during the economic recovery.”
The factors shaping the lending environment for franchise business in 2013 include higher demand for franchise transactions, greater franchisor capacity for growth, increased lending ability by banks to franchisees, increased willingness for both SBA and conventional lenders to finance franchisees and a moderate pace of economic recovery through 2013.
In addition, in 2011, IFA launched a comprehensive outreach campaigned aimed at educating the lending industry about the components of franchising and to help franchisees become better prepared in requesting loans in the new, normal lending environment. The campaign resulted in the development of various tools for the industry, including a new website, www.smallbusinesslendinghub.com, to provide a one-stop shop for lending information, as well as a franchise lending template to help standardize the materials provided to banks. Two Small Business Lending Summits in 2011 and 2012 helped to foster greater understanding among the franchise and lending industries, as well as government leaders.
According to the new study, franchise demand for funding to spur growth has surged in 2013, up 10.6 percent over 2012, so despite the increase in lending, there is still a 9.7 percent shortfall, or $2.6 billion, between franchise demand for growth and banks’ ability to meet the demand. The shortfall between demand for financing and availability was 9.1 percent in 2012 and 9.7 percent in 2011. The $2.6 billion (9.7%) shortfall will result in 6,400 units not being created, with the loss of 85,900 jobs that will not be created (or in some cases maintained), and $11.4 billion in economic output to the U.S. economy.
Additional key findings from the report are below:
Franchises are doing better than the rest of the economy as banks’ willingness and ability to lend continues to steadily improve, yet economic and government policies continue to stifle growth potential and job creation. Public policy issues such as sequestration, the impending costs of the health care law, increases in tax rates (both recent and potential), fluctuating commodity prices, higher energy costs and recent talk about a potential minimum wage increase continue to chip away at the profit margins of existing franchisees.
Banks’ willingness to provide conventional loans will increase by 16.1 percent and by 20 percent for SBA guaranteed loans. However, because of sequestration and the reduced budget for SBA-guaranteed loans, SBA lenders’ ability to provide capital will be reduced. As a result, the net willingness for SBA guaranteed lending is projected to decline by 6.7 percent to reflect the total loan amount that SBA lenders are able to issue. Commercial financial institutions are still cautious about small business lending and are prepared to tighten their underwriting standards at any signs of economic distress. In the fourth quarter of 2012, 89.2 percent of senior loan officers reported that their lending standards remained unchanged, while 1.5 percent reported somewhat tightened credit standards for small firms. At the same time, the net fraction of banks reporting increased capital demand from small firms rose to its highest level since 2005
Franchise systems that have come through the recession are showing increased capacity for growth and ability to support new units.
Similar to 2012, franchisor capacity, including staff and resources to support franchisee recruitment efforts, will not be a restraining factor in 2013. During the recession, franchisors’ capacity to grow was limited. The improving economic and business climate over the past couple of years has helped franchisors to reinvest in their franchise development capabilities and strengthened their capacity to grow.
There is still a lending gap – more than 9 percent – between franchise businesses demand for growth and banks’ ability to meet that demand.
Lenders will have a pool of more than $34.8 billion available to finance franchise unit transactions in 2013. This represents a 13.4 percent increase from the adjusted $30.7 billion FRANdata estimated for 2012, reflecting economic growth and strengthened banks’ balance sheets. At the same time, however, banks will only be willing to provide a total of $23.9 billion in lending to new and existing franchisees. Even though this represents a nearly 10 percent increase from the adjusted lending volume banks were willing to provide in 2012, it is still not sufficient to meet the borrowing needs of all transactions projected for 2013.
New and existing franchise units will create or maintain 797,700 jobs and generate $106 billion of annual economic output to the American economy.
Despite the surge in lending, franchise demand for loans to spur growth has surged as well, up 5.7 percent over 2012, resulting in a 9.7 percent shortfall, or $2.6 billion, between franchise demand for growth and banks’ ability to meet the demand. The shortfall between demand for financing and availability was 9.1 percent in 2012 and 9.7 percent in 2011. The $2.6 billion (9.7%) shortfall will result in 6,400 units not being created, with the loss of 85,900 jobs that will not be created (or in some cases maintained), and $11.4 billion in economic output to the U.S. economy.
About the International Franchise Association
The International Franchise Association is the world's oldest and largest organization representing franchising worldwide. Celebrating over 50 years of excellence, education and advocacy, IFA works through its government relations and public policy, media relations and educational programs to protect, enhance and promote franchising. Through its media awareness campaign highlighting the theme, Franchising: Building Local Businesses, One Opportunity at a Time, IFA promotes the economic impact of the more than 825,000 franchise establishments, which support nearly 18 million jobs and $2.1 trillion of economic output for the U.S. economy. IFA members include franchise companies in over 300 different business format categories, individual franchisees and companies that support the industry in marketing, law and business development.
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