Bankers Note Growing Franchisee Loan Market

"Though Franchisees Have Advantages Over Traditional Small Businesses, Banks Still Are Neglecting Them"

On January 1, the online version of U.S. Banker, a monthly magazine that targets banking executives, will feature a story "In Pursuit of the Next Whopper: Rising Franchisee Class". It points out the large and growing market that bankers have largely ignored - franchisee loans. What looks like figures from Terry Hill, spokesperson for the IFA, the article states, "The number of franchises in the U.S. has grown from about 1,500 to 2,500 since 2003, according to the International Franchise Association (IFA). Moreover, franchising is seeing a 10 percent to 12 percent growth rate annually."

Potential of Franchise Loans: Although some might argue the accuracy of the IFA numbers, what can safely be said is that the number of franchise owners is big and they have been growing.

Yet, the bulk of franchise financing is by non-bank lenders such as CIT or GE Money. And for the few banks that participate in franchisee loans, franchisee loans compromise only 1 to 3 percent of total loans, according to Mr. Paul Merski, an economist at the Independent Community Bankers of America.

Such untapped loans offer huge potential. Franchise loans are attractive to banks because:

"The franchisee already has a leg up on the traditional small business, in terms of creditworthiness. His franchise usually receives... benefits from the franchisor's ongoing advertising campaigns, as well as access to occasional management classes."

The Future Loan Market: Rick Anderson, general manager at Franchise Finance, expects the franchising business to be strong, at least until late 2008. Anderson observes, "Usually, franchising is counter-cyclical to the overall economy. When the economy is soft, people are more inclined to start a franchise. In the 1990s, things got tight, everyone was working but when the dot-coms went bust, and people had golden parachutes, and interest rates were low, that was the Holy Grail."

Word of Caution About Loans to Franchisees: Franchise loans may look like a large and lucrative market for bankers to explore, but franchisees need to be careful about loans they receive.

Jim Herst of Performance Source adds a word of caution to Blue MauMau that franchise owners typically try to use larger loans to pay off debt. Herst says, "The franchise owner does not realize that debt settlement at a discount is available. Typically, he bankrupts, or borrows to pay his bills. His loan is just one bigger debt, and often this ends up biting him, in the end!"

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