Show Me the Money

I started in the franchise business in 1976 as a consultant to ServiceMaster Industries and have enjoyed many years of helping people to obtain their dream of purchasing their own business. Well, at least until the fall of 2008, because that’s when the fun ended. Franchise financing, which we all took for granted, suddenly came to a screeching halt and has stayed unavailable right up to the present time.

If you have tried to purchase a franchise in the last 18 months, you know that it is almost impossible to obtain a bank loan. But, you don’t need me to tell you that, all you have to do is go online and you will receive the depressing news for yourself. Here is what the International Franchise Association said in its January 2010 Franchising World trade magazine:

“Half of franchise business leaders cite access to credit as top concern.”

“A $3.4 billion shortfall in lending to franchise businesses in 2010 will result in 134,000 jobs not created and $13.9 billion in economic output lost, according to new data released in December by the International Franchise Association. Our data show that while there will be sufficient capital for franchise development in 2010, banks’ continued risk aversion is limiting their willingness to lend,” said IFA President and CEO Matthew Shay. “A slow recovery with limited job growth underscores the importance of protecting and encouraging lending to small businesses, which account for 60 percent of all U.S. jobs. Immediately passing enhancements to government lending programs can shore up the $3.4 billion shortfall in lending. New franchise businesses can create much needed jobs, which will speed the U.S. economic recovery.”

Now, I realize that we all are starting to read upbeat articles online and in the newspapers, but as a person who deals with franchise candidates seeking financing on a daily basis I can tell you that nothing has changed since October 2008. I work with franchise candidates who have 780 FICO credit scores and have equity in their homes, and they still cannot get a bank loan with or without an SBA-backed guarantee.

Here is an actual example of a candidate who was interested in purchasing an LA BOXING gym franchise. She and her husband live in a western state and own a very successful wood floor installation business that they started 7 years ago. She completed an LA BOXING franchise application and was approved by the company. She told me that she knew the president of the local bank and that procuring a loan to purchase the franchise would be a “slam dunk.” The short version of the story is that the bank and SBA declined her loan because she did not have experience in the “gym business.” It didn’t make any difference that she operated a profitable flooring business, met a payroll every week for over 10 employees, and would have a successful franchise company that would provide a total turnkey franchise to her with training and ongoing support. How successful is her flooring business? It produces a net profit after all expenses of over $15,000 per month and she and her husband have equity in their home. Here is a successful businesswoman who loves to exercise and wants to get into the health and fitness business and can’t get a loan because of her bank’s continued risk aversion policies.

What I don’t understand is, the banks received billions in the bailout from TARP, so why can’t a bank make a loan to a person who has business experience, a good credit score and equity in her home? I’m not suggesting that banks revert back to the ridiculously loose lending practices that caused the financial crises, but isn’t there some middle ground that can be achieved so as to allow credit-worthy small businesses to obtain funds to operate profitably and help create new jobs?

So, what is the solution for anyone interested in purchasing a franchise today and doesn’t have, say, $200,000 liquid? I can tell you that most of the franchises I am selling involve financing from friends and relatives or taking in a money-partner. But even friends and relatives want assurance that loans will be repaid and partners are going to expect equity in your business and a portion of net profits. You will need to prepare a business plan and first assure yourself that the franchise you purchase has a reasonably good chance for success before you approach investors. Most of the information that you incorporate into you plan will come from the franchise company and speaking to some of their franchisees.

And finally, the current economic climate will absolutely change in the future and banks will certainly begin to make loans again; the problem is that no one has a crystal ball so we don’t know exactly when that will happen.