Franchises Caught in Credit Crunch

Writer's note: This is one of the overlooked risks of being a franchisee. Unlike the franchisor, who can limit liability through use of the corporate form, most franchisees are placing their personal assets at risk and need to understand that and decide how risk tolerant they are.

Sub-prime rate fiascos. Mortgage loans not being paid. Foreign bankers calling in credits. Could this be affecting franchise ownership?

Bankers are tightening lending standards. The greatest risk for smaller businesses is not higher interest rates but rather the drying up of capital. The sense on the street (at least as reported in the Dallas Morning News below) is that underwriting guidelines for small business deals are being readjusted, and that this is affecting franchises. 

The situation is worse for entrepreneurs who financed the purchase of a franchise through adjustable-rate home-equity loans. Lawrence Clasby, chief executive of Grapevine-based Sparkling Image Franchising, said the commercial cleaning company has a few franchisees finding it difficult to make their higher loan payments.

"That financial model made sense two or three years ago," he said, "but now those loans are adjusting. ... They didn't budget for those adjustments."

Mr. Clasby's company has 44 franchise locations in Canada and the United States. As franchisor, he said, his company has no liability if those franchisees fail.

Still, he said, he hates to see a franchisee lose a market, especially after making it through the toughest first few years.