Franchise loan availability tightens

Jessica SarterFranchise Finance

In recent years, franchises, especially those in the foodservice industry, have experienced widespread success despite recessionary conditions. Though myriad programs from government agencies and franchise advocacy groups have worked to boost lending to this sector, some franchisees are now citing difficulty when trying to obtain credit.

Tightened availability of loans
The Associated Press reports that prospective franchise owners have experienced the most difficulty in the loan application process. Because these new entrepreneurs often do not have much collateral, business ownership experience or established corporate credit scores, banks are increasingly turning down their loan applications.

As an example, the AP interviewed one entrepreneur who tried to launch a location under the Doctors Express franchise, which specializes in urgent care facilities. The man said that he had received the most negative answers because of his limited business experience and collateral, as well as the franchise’s lack of popularity.

The latter, the AP explains, is a growing reason banks cite for rejection in the franchise loan application process. Adding this to the other issues facing new franchise owners creates a very difficult process that many are not choosing not to undertake.

Corroborating evidence in earlier reports
The latest International Franchise Association (IFA)/BoeFly Franchise Lending Index revealed that loan disbursement volumes for franchise owners decreased more than 3.6 percent from June to July. This was directly following a nearly 5.75 percent increase in franchise lending in June.

Though July’s figures still reflected year-over-year growth of 1.43 percent, officials from the two organizations cited concern for the overall health of franchises.

“The downward pressure on franchise lending confirms that credit access continues to be a challenge for franchisees given the ongoing uncertainty in the economy and weak consumer confidence,” IFA President and CEO Steve Caldeira explained in the release. “To improve the business environment for franchising, IFA continues to educate members of Congress and the Administration on the challenges facing franchise small business owners and the importance of policies that facilitate capital access and job creation.”

Notably, the quick-service restaurant (QSR) category of the index continued a strong showing, logging a 28 percent year-over-year increase in loan disbursement volumes.

Help on the way
Though the outlook is slightly dimmer than other months for franchise financing, the battle is not over yet, as many groups offer substantial support to franchisees. This includes BoeFly, a firm with a large focus on the franchise sector, as well as small business lending at large.

BoeFly has been cited as an excellent resource for franchisees, as the firm connects borrowers with lenders through advanced algorithms. Further, with more than 2,200 participating lenders and only one loan application required, the service proves invaluable through improved efficiency and better results.

Finally, the firm offers an infographic and accompanying guidance regarding how to get a franchise loan. This includes understanding the lending market, how to properly assess and communicate the needs of the company to potential lenders and preliminary preparations in the planning process.