GE Capital Curtails New Restaurant Franchisee Lending

Paul Ziobro of Dow Jones Newswires reports in SmartMoney that GE Capital's franchise finance arm is becoming more stringent in pricing and issuing loans for new franchisees, a pullback by one of the largest lenders to restaurant operators in the latest sign that Wall Street's turmoil is spreading to small businesses.
While GE Capital spokesman Stephen White stopped short of saying there was a total freeze on lending to new franchisees, he said the franchise finance arm has become more critical in initiating new loans but continues to do business with 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 this environment, we're taking a longer look and even a closer look than we have in different times and that just makes sense."
Stephen Vaughan, chief financial officer of Sonic Corp. (SONC), told Dow Jones Newswires Thursday that franchisees of the drive-in chain have been notified by GE Capital's franchise finance arm that it will temporarily stop financing new loans to Sonic franchisees. GE Capital is one of Sonic's approved lenders.
Other restaurant industry deal makers have said in recent days that they have been turned away from GE Capital's franchise lending practice when seeking new loans.
Sharon Zackfia, a restaurant industry analyst, said in an investor note Friday morning that GE Capital has halted new franchisee franchising, although it will continue to honor pre-existing financing agreements.
The action by the financing division of General Electric Co. (GE) is the second major lender to the restaurant industry to pull back this week, following news that Bank of America Corp. (BAC) has declined to increase existing loans to McDonald's Corp. (MCD) franchisees, whose U.S. base is in the midst of installing equipment for sales of lattes, cappuccinos and other drinks.
Such moves could impede plans by restaurant operators to remodel existing stores, install new equipment, open new locations or convert existing company-owned stores to franchised locations, Zackfia said. She cited Sonic and Panera Bread Co. (PNRA) as two chains with a heavy reliance on franchise growth that could be most affected.
"While clearly other sources exist for franchisee funding options, the recent pullbacks of two of the main lenders in the arena are disconcerting, to say the least," Zackfia said. GE Capital and Bank of America are two of the largest national lenders to restaurant franchisees and restaurant deals. Other major lenders include Wells Fargo & Co. (WFC) and Wachovia Corp. (WB).
Credit conditions have become tight in the restaurant industry over the last couple of years, as major lenders helped finance a hefty diet of loans backing leveraged buyouts and expansions. "Financing for the larger transactions is not as prevalent as it was a year-and-a-half ago," said David Epstein, principal at the investment bank J.H. Chapman Group LLC.
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Sonic responded to remarks made concerning the company's franchisees, who were used to illustrate the problems of a tightening credit market. As the company pointed out last week in clarifying a national news story about GE Capital, Sonic has not been informed of any cut-back in franchisee financing and continues to have other financing sources beyond GE Capital, which represents less than 10% of the lending to Sonic franchisees. Sonic's franchisees, in fact, ordinarily rely on multiple lending sources for their capital needs. As such, the company believes the brand remains poised to continue its expansion into new markets and that Sonic franchisees remain on course to complete more drive-in retrofits in the coming year.
Jim Coen
877-469-3002
Blog: Lets Talk Franchising
Executive Director of the New England Franchise Association
Director & Clerk, Dunkin Donuts Independent Franchise Owners (DDIFO) Board of Directors
Jim Coen
877-469-3002
Blog: Lets Talk Franchising
Executive Director of the New England Franchise Association
President, Dunkin Donuts Independent Franchise Owners (DDIFO, Inc.)
I wouldn't be happy about reliance on CIT for funding.
They have been having problems for a while now, and I doubt they are in better shape now than a few months ago.Their stock dropped by $2.10, that is a drop of over 25% in a single day.
BTW: The stock is now just over $6, which is down 85% from its 52-week high.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
that could happen to a franchise investor if it keeps him from signing up to become a new franchisee in this economy. It's too bad that people are so bloody oblivious/--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School