Restrictive Financing May Cause Franchisors To Change For The Better
Due to tighter lending standards franchisors have taken to helping finance new franchisees having difficulty raising capital through traditional lending sources. Marco's Pizza, Quiznos and other franchisors are creating financing arms when banks decline to work with "franchisees who are unable or unwilling to make a large equity investment in their business."
"This year, the franchise industry is expected to seek $10.1 billion in capital, but banks are expected to lend only $6.7 billion, according to the International Franchise Association." Unfortunately for franchisors, banks are taking a closer look at the cash flow of these companies and selecting only the stronger systems to finance. "Darrell Johnson, president and chief executive of FRANdata, a leading franchise analysis business, predicted that the tighter lending environment would impose a new form of natural selection on franchisers. Until recently, financing has been available to both poor performers and high performers, but it will increasingly favor the latter. To survive, he said, franchisers need to “think like bankers.”" - NY Times
Mr. Johnson seems to believe this could be a good thing for franchising going forward:
“Banks are defining who can play and who can’t play on the basis of risk analysis,” Mr. Johnson said. The stronger franchisers “are going to survive and do well because they’re going to get access to capital,” he said. “But it’s going to require the performance of franchise systems to change to meet the standards that banks are requiring. It’s going to be a system-strengthening process.”