NEW REPORT MAKES CASE FOR NEW SMALL BUSINESS LENDING POLICIES
Ending Credit Logjam Will Create More Jobs
WASHINGTON, May 12, 2009—A new study released today confirms that the current recession and the corresponding credit crunch is hampering the franchise industry’s ability to create jobs and economic growth on Main Street, the International Franchise Association said today.
“Historically, franchising as a business model has been extremely resilient to economic slowdowns, which has helped spur the pace of economic recovery and provide alternatives to individuals who were down-sized or displaced by other businesses or sectors of the economy,” said Matthew Shay, IFA president and CEO. “The new report shows that for every $1 million of lending obtained by franchise small businesses, 34 jobs are created and $3.6 million in annual economic output is realized. However, the credit crunch is constraining this potential growth and slowing economic recovery.”
IFA presented the report to lawmakers as they address ways to stimulate the economy. The study, Small Business Lending Matrix and Analysis, prepared by FRANdata for the IFA Educational Foundation, shows the relationship between lending to the franchising industry and the industry’s capacity to develop new businesses and expand existing businesses. Because of current conditions, the study predicts a 40 percent reduction in franchise lending in 2009. This reduction will result in the loss of nearly 50,000 jobs and over $5 billion in economic activity.
The Small Business Administration reports that small businesses have accounted for 60-80 percent of annual job creation over the past decade, and currently account for almost 50 percent of total jobs in the private sector.
Shay pointed out that recent economic stimulus legislation provides nearly $800 billion, but less than one-tenth of 1 percent is dedicated toward assisting small businesses. “Policies that promote lending to small businesses will create a more sustainable and less costly economic recovery,” he said. “Congress and the Administration must do more to free up capital for small businesses.
“We can break the logjam of capital for new small business creation and expansion of existing companies by making modest changes to SBA lending policies,” he added, “but every day that we delay fixing this credit mess will cause more small business owners to wither on the vine due to constricting credit policies.”
With sufficient levels of available credit, franchise businesses can help lead the country to economic recovery as they have done in previous economic downturns. Between 1999 and 2006, the number of franchise units grew at an annual average rate of almost 6 percent. During the 1999 and 2002 tech bubble, new unit growth continued at 5 percent.
The report projects that without current capital constraints, in 2009 there would be close to 35,000 new franchise units and transfers, which equates to a total of 279,000 jobs created or protected, and a total annual economic output of $30 billion.
The report also indicates that the franchising industry will require an estimated $8.4 billion in financing to meet 100 percent of demand in 2009. To help ensure that money is available, IFA recommends the following actions to assist the small business community.
-Increase the SBA 7 (a) Maximum Loan Limit from $2 million to $3 million and the maximum loan guarantee from $1.5 million to $2.7 million so that the small businesses that can create the most jobs can participate in the program.
-Allow pricing of SBA loans to be competitive with other forms of capital investment. Current SBA rate caps do not reflect real-world credit risk spreads and discourage bank lending.
-Reverse the new SBA policy on “goodwill” financing of business acquisitions.
-Promote reasonable audit standards so that banks have certainty that loan guarantees will be honored.
“We urge lawmakers to move quickly on these policy recommendations,” Shay said. “Leveraging the economic engine of franchise businesses will result in hundreds of thousands of new jobs and tens of billions of new economic output for our economy. That’s a return on investment that taxpayers deserve.”
The full report, Small Business Lending Matrix and Analysis, can be viewed by clicking here.
About The International Franchise Association
The International Franchise Association, the world’s oldest and largest organization representing franchising, is the preeminent voice and acknowledged leader for the industry worldwide. Approaching a half-century of service with a growing membership of nearly 1,300 franchise systems, 10,000-plus franchisees and more than 500 firms that supply goods and services to the industry, IFA protects, enhances and promotes franchising by advancing the values of integrity, respect, trust, commitment to excellence, honesty and diversity. For more information, visit the IFA Web site at www.franchise.org.