Lending Shortfall Impedes Franchise Business Growth
FOR IMMEDIATE RELEASE
LENDING SHORTFALL IMPEDES FRANCHISE BUSINESS GROWTH
New Research Cites Regulations, Uncertain Economic Recovery, as Factors Stifling Job Growth, New Establishment Formation
WASHINGTON April 16, 2012 – Lending to franchise businesses has improved in the past year, but lending levels will not meet demand in 2012 resulting in a projected 18.6 percent shortfall, and nearly 94,000 jobs not created and $12.9 billion in economic output not generated, according to a new report commissioned by the International Franchise Association.
"While we're very pleased to see an overall increase in loan volume over the last year, a significant shortfall in lending continues to limit franchise growth," said IFA President & CEO Steve Caldeira. "Even though the lending gap is slightly smaller this year, down 5 percent from the 19.6 percent shortfall in 2011 and 22.8 percent in 2010, the industry is still not able to create the number of jobs and provide the level of economic output we experienced before the recession. If we could close the 18.6 percent gap between supply and demand, franchise businesses would be able to generate $70 billion in economic output and create or protect more than 522,000 jobs to the U.S. economy."
The Small Business Lending Matrix and Analysis, vol. 4, prepared by FRANdata for the IFA Educational Foundation, shows franchise businesses will require $11.72 billion in new lending capital but banks will only make $9.5 billion available, an 18.6 percent shortfall. The report says the improvement can be attributed to greater demand for new franchise units and transfers, increased franchisor capacity for growth, greater bank willingness and the ability to lend along with an economy that is slowly improving. Despite the shortfall, FRANdata projects that 35,997 unit transactions will be financed in 2012, creating or maintaining more than 425,000 jobs and generating $56.7 billion of economic output.
According to the report, many factors are contributing to the shortfall, including tighter credit standards, increased scrutiny by regulators has led to greater risk aversion by bankers, tax uncertainty and the depressed housing market which still hasn't bottomed out.
"In the competition for limited credit, franchise businesses must prove credit worthiness by showing strong unit economics and system performance," said Caldeira. "With a still slow, uneven and sluggish economic recovery, coupled with a stricter regulatory environment as a result of Dodd-Frank, the pressure to maintain and create jobs has never been greater for franchisees, franchisors and the overall small business community."
The research is a part of IFA's ongoing Small Business Credit Access Campaign, launched a year ago in collaboration with the National Association of Government Guaranteed Lenders (NAGGL) and the Consumer Bankers Association (CBA) to improve capital flow to franchise small businesses through outreach, advocacy and tools and solutions offered through the IFA's award-winning website, www.smallbusinesslendinghub.com.
These tools and solutions include:
- A new IFA/BoeFly Franchise Lending Index to measure franchise credit access on a monthly basis;
- The Franchise Lending Template co-developed with CBA's Small Business Committee to streamline lending to franchises;
- FRANdata Bank Credit Report to advance franchising as an asset class.
As part of the campaign, key policymakers and financial regulators will gather with lenders and borrowers April 17 at the 2nd Annual Small Business Lending Summit at the JW Marriott in Washington. Speakers include Karen Mills, Administrator, U.S. Small Business Administration, Martin Gruenberg, chairman, Federal Deposit Insurance Corporation, U.S. Comptroller of the Currency Thomas J. Curry, Rep. Kevin McCarthy (R-Calif.), Majority Whip, U.S. House of Representatives and Don Graves, Executive Director of the President's Council on Jobs and Competitiveness.
The event will showcase expanded partnerships between organizations representing lenders and borrowers, including leaders from the Financial Services Roundtable, CBA, NAGGL, the Independent Community Bankers Association, the National Bankers Association, the National Federation of Independent Business, the Asian American Hotel Owners Association, the U.S. Chamber of Commerce, Syracuse University, the U.S. Conference of Mayors, the National Association of Development Companies, American Express, BBVA Compass, Bank of America, CIT, Franchise America Finance, Guidant Financial, US Bank, Hispanic Alliance for Prosperity Institute, NAWBO, BoeFly, DLA Piper, InterContinental Hotels Group, International Council of Shopping Centers, BrightStar Healthcare, Five Guys Burgers & Fries, FASTSIGNS, Driven Brands, Marriott International, PepsiCo Foodservice, Restaurant Business, The UPS Store, Coca-Cola, Choice Hotels International, and FRANdata.
"As banks ratchet up their small business lending programs, franchise lending offers exactly what lenders are looking for given the franchise model's structured, proven and scalable format that offers higher returns on an initial loan investment and system-wide data demonstrating performance history," said Caldeira. "Our efforts over the past year to help lenders understand the power of franchising and to help our members become better prepared to apply for loans is helping increase the lending levels and spur job creation."
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.