IFA Members' "Business Model" Too Weak For Non-Guaranteed Lending?

Steve Caldeira, IFA's new president, is focusing his efforts to increase lending to the franchise industry.  Caldeira is lobbying lawmakers to show them  "the steps Congress can take to encourage more banks to lend to franchise businesses."

  Apparently, loosening lending standards and having the government guarantee 90% of the loan is the only way banks will lend to these "proven, successful business models".  Perhaps it would be easier for the IFA to recommend its members open their books to prove the true profitability of their systems.  Showing the actual financial revenues of their franchisees should help "encourage more banks to lend to franchise businesses". 

"Caldeira says that pursuing social and economic policies that conduce banks to begin lending again will be his top priority as he begins his tenure."  As with the FNMA/FHLMC sub prime success, the IFA appears to be selling the same social/economic strategy. 

According to Caldeira, franchising is crucial to U.S. job growth - apparently similar to the U.S. stimulus strategy.  Without this lending "electricians lose jobs, drywall guys have nothing to do, and franchisee don’t hire."  First, buildouts, et al, is not a growth strategy.  Just like gov't roadwork positions didn't stimulate growth, they are short term positions.  Second, franchise employment are usually low paying, minimum wage positions:  "Caldeira says more access to financing means franchisees can hire more taxpayers."  The great majority of these workers will pay minimal, if any, taxes under current IRS regulations.

In my article from yesterday, the IFA was seeking to lobby the Senate to promote an ammendment to increase franchise financing guarantees.  The IFA's continued efforts in Washington will most likely increase:  “This means we must escalate our advocacy efforts to ensure that our voices are heard even louder so that Congress takes action on the simple and common-sense steps we think will help to create jobs.” 

“Our biggest challenge—and our biggest opportunity—is to educate our elected leaders so that they will see it. Our message is compelling, and it’s an urgent one in light of the economy here at home and around the world: Give us the policies that help franchise businesses open their doors, and we will do the rest.”   QSRMagazine.com

". . .and we will do the rest"?  Perhaps it is the clarity of this statement that has the banks on edge.



Oldsaw economic and finance fallacy

Oldsaw your nescience knows no bounds.

Private sector construction projects and jobs are stimulative to the economy since the real property tax base and income tax revenues are increased.

Some lenders do require franchisors to provide additional unit level financial disclosure to the lender. But if you're a banker and you can get a 90% guarantee on a SBA 7A and 504 loans why would you do a conventional loan? Maybe you should criticize the banking industry for their practices in commercial lending? And remember financing for non-franchised existing businesses and start-ups is also constricted in the current lending environment.

Re: Economics and franchisor financial fallacy

My dear guest, aren't these "proven, successful business models"?  Unlike a standalone startup, a franchise business provides a system which supposedly, when followed, will produce a given result.  As such, there is a historical record of the actual past results of all franchisees within a given system. 

Guest, if these systems were so "successful" then a franchisor need not utilize SBA loans.  In fact, Mr. Caldeira, and franchisors in general, are upset because banks have stopped making SBA loans since the 90% guarantee was reduced to the usual 70-80%.  While I would expect the banks to refuse lending to standalone businesses, surely given the "success" of these business models, the banks should have no problem approving a loan with a 75% guarantee given the historical profitability.

Being the upstanding individual you are, you would only want systems that actually succeed sell their franchises and gain loan approval.  If the "projections" are indeed real (which, then, should be proveable) then the banks should have no reason to fear the decreased guarantee. 

Again, "proven, successful business models" with much historical data to back it up.

How would it work Mr. Oldsword?

"Again, "proven, successful business models" with much historical data to back it up."

Would new franchisors be able to start franchising under your standards?

Not unless

they operate company models as a basis for successful franchising. I know its a strange concept.

RE: Not unless

Of course I am talking about a legitimate franchisor candidate with at least one operating unit with regard to Mr. Oldsword's standards. How would it work, Mr. Oldsword?

Government policies distort free market forces


This is what my mentor, Carl Menger, has said on the subject: "Money is not an invention of the state. It is not the product of a legislative act. The sanction of political authority is not necessary for its existence.”

Stop having the government manipulate the market in some false hope that it will create more sustainable fry flipping, hamburger heating and pizza parching jobs that have better tax and property revenues than whatever the market would put in their place.

if the only financing your "system" can get is SBA...

That's a red flag, or at least a yellow one.  We are mutli-unit Zees, started 15 years ago with a single store.  We have never had an SBA loan.  If your "system" is indeed strong enough, SBA is not the only answer.  I understand that a lot of people need to turn to SBA, but don't assume that is the ONLY way to finance a franchise business.

Never meant to imply "only" SBA financing

Granville, even weak systems can get regular bank loans - provided the borrower has enough assets to overcollateralize the loan. 

What is most important  is that so many franchise systems need to inflate (exaggerate, lie) about their first and second year revenues in order to meet SBA loan standards and get approval.