Small Business Owners Facing Credit Crunch

WASHINGTON, D.C. (Blue MauMau) - Small business owners are finding it increasingly difficult to obtain loans to expand operations, replace aging equipment and weather seasonal troughs. How difficult? There are an increasing number of reports from store owners and franchisor head offices complaining that banks and financial service firms have frozen lending activities.

C.K. Patel, an owner of multiple motel franchises in the Southeast, says, “The local branch manager of a bank told me that they will not make any motel loans at the moment, despite my excellent credit history. None.”

Patel, who is also a leader for the Asian American Hotel Owners Association, America's largest association of franchise owners, elaborated, “I'm a large and long-time customer of theirs with strong credit. If they do not want to lend money for my businesses, I shudder to think of all the other hotels and motels that are getting turned down.”

Hugh Suhr of Atlanta-based SunTrust Bank's corporate communications office says that the bank is being more cautious, but stops short of saying that it won't make loans to motels. Suhr declares, “Obviously in today’s environment it is prudent for lenders to be more conservative with lending considerations. However, we continue to look at each opportunity on a case-by-case basis to serve the needs of creditworthy clients with sound business plans and practices.”

Robert Mandelbaum, Director of Research Information Services of PKF-HR, a consulting and research firm for the hospitality industry, confirms what Patel is saying about how the lending market has dried up for hotel investors. From his position of observing the industry, Mandelbaum states, “lending pretty much froze up a few months ago. Accordingly, we lowered our forecasts for new supply in 2010 and 2011.”

News reports from all over show that it is a much wider phenomenon than bankers shying away from expensive hotel and motel investments. Hotels and motels are some of the largest franchise investments, possibly costing some $7 million compared to tens of thousands of dollars for other types of franchise investments. The lack of lending capital is hitting franchise owners across the spectrum, including those with well-established brands and strong credit records.

Stephen Vaughan, chief financial officer of Sonic Corp., a chain of over 2,500 drive-in quick service restaurants, told Dow Jones Newswires,of the difficulty it and its franchise owners were having in obtaining loans. Vaughan said GE Capital is one of Sonic's approved lenders.

“We had heard through industry sources that GE put a temporary hold on their lending," the CFO said in the article.

GE Capital spokesman Stephen White did not say that there was a total freeze on lending to new franchises but did say that GE was more cautious in granting new loans and was focusing its credit efforts on existing customers. "We are still active in the restaurant industry and we continue to quote deals where it's competitive and appropriate," White said in the article. "In this environment, we're taking a longer look and even a closer look than we have in different times and that just makes sense.”

It is also withholding offering rates until the market settles down. "The quoting of a rate is now at the back end of the process," White said.

Last week Blue MauMau contacted GE Capital's franchise-lending arm, GE Franchise Finance Services, to find out the status of its lending policy to franchise owners, given this rocky credit environment. The firm stated that it did not want to make any comments regarding franchise loans and suggested that GE Franchise Finance Services may be prepared to answer questions on the availability of credit at the end of November.

General Electric announced last Friday that it plans to clip the wings of its finance unit, GE Capital, by substantially shrinking lending activity. GE shares rose 4% on the news. The Wall Street Journal reported ($$) General Electric's CEO Jeff Immelt as stating, “"We've never seen really a time of volatility like we have seen in the last month or so."

The article reports, “The company said tough conditions in the financial-services markets 'are not likely to improve in the near future.'"

The Senior Vice President of the American Bankers Association's Center for Commercial Lending and Business Banking, Bob Seiwert, is mindful that lenders will lend. "That's where they make money," Seiwert states. “As banks struggle to remain solvent or to trim down bad loans, bankers will take care of their good customers first.”

At the moment that is not so apparent.

A Chicago business journal reported last Monday that an internal memo at McDonald's stated that franchise owners, some 14,000, could not access lines of credit from Bank of America to carry out a planned $100,000 expansion for each unit into specialty coffee. The news was quickly reported throughout the country. Bank of America, one of the few healthy "super" banks regarded highly by the market and the Fed, responded the next day in the Chicago Tribune that it would not freeze lines of credit to McDonald's franchise owners.

Sources had informed this journal that Comerica, a banking chain from Florida to California, has become much more selective in funding franchise owners only from extremely strong systems. When asked, Wayne Mielke, Vice President of Corporate Communications for Comerica, released this statement, “Comerica is still lending to franchise owners. It is an important business for us.”

Despite lenders' almost universal assurances that they are still interested in providing loans, for the time being franchise buyers and franchisors of some of the best-established brands are complaining that they are not receiving credit.

Still, Randy Jones, partner at Funding Solutions, LLC, a loan broker for franchises, thinks that amidst the grim credit crunch news right now, there are pockets of loans that are available.

“These examples [Bank of America, GE Capital, SunTrust and others] are probably not Small Business Administration loans,” Jones says. New franchise buyers without major property purchases tend to take on SBA loans. “SBA lenders are more active right now," he observes. “SBA loans have tightened less than conventional loans, where little is getting done.”