2011 Franchise Financing Outlook: Four Experts Weigh In

Money makes the world go around, as the saying goes. But when there’s not enough money to go around, growth in some of the world’s strongest industries — even franchising — can slow to a halt. Since the recession hit, franchising has taken a beating as financing for new franchises has become cripplingly scarce. Now the burning question is: Will it be possible to finance a franchise in 2011? We checked in with four experts to get their thoughts on what would-be franchisees can expect in the year ahead.

Ronald Feldman, CEO of Siegel Financial Group, a company that specializes in placing financing for franchised and independent businesses:

Franchising financing will be possible to obtain, but will all depend on some primary factors, including how established the franchise is, how qualified the franchisee is and how appealing the overall “package” is. “The application package is probably the biggest hindrance to getting loans approved for new franchisees,” says Feldman. “Having a professionally prepared package that answers the initial credit reviewer’s questions is paramount to getting into the formal underwriting process. Incomplete or poorly prepared packages will be tossed in the round filing cabinet.”

One notable factor: Already, franchisors have gotten involved in assisting franchisees with lenders and to secure financing, and that will continue in 2011. “Smart, progressive franchisors are aligning with lenders to create finance programs for franchisees,” says Feldman. “Some are throwing some ‘skin’ in the game by providing credit enhancements to lenders, while others are simply allocating resources - internal or external - to making sure that the lending community understands their concept and metrics.”

Overall Summary: Says Feldman, “Being prepared and, more importantly, qualified, is the way to be successful in financing a franchise for 2011.”

Jeff Elgin, CEO of FranChoice Inc., a network of franchise referral consultants:

“I think we’ll see a slow but steady revival of business startups as we go through 2011, though [franchise] loans will go only to people who are absolutely blue-chip credit risks with lots of strong non-business asset collateral,” says Elgin. Elgin’s optimistic outlook stems partly from the fact that he heard that a handful of SBA guaranteed loans (under $150,000) were granted in the fourth quarter of 2010. “We haven’t seen one of those since the fall of 2008,” says Elgin.

One notable factor: Real estate will both help and hurt the franchising industry in 2011. Since the demand and value of real estate has fallen, a primary source of non-business collateral for securing loans has vanished, says Elgin. However, the decline in real estate demand will translate in to opportunities for some franchisees, who will come to find that prime locations are more accessible and rental rates are down.

Overall Summary: 2011 is bound to be better than the past two years because the market couldn’t possibly get much worse than it has been.

Joel Libava, aka the “Franchise King,” a franchise advisor:

Getting financing is possible for anyone with an open mind; however, getting a startup franchise loan from a bank will require jumping through lots of hoops, as banks will not be letting go of their money easily anytime soon. Some factors, such as real estate – which is often no longer an asset but a liability – don’t help to strengthen a franchise candidate’s loan application. “If a prospective franchise owner applies for a startup franchise loan, things like high debt, home equity status, and negative credit will be real red flags for the bank’s underwriters,” says Libava.

One notable point: A growing number of franchisors are attempting to sell conversion franchises, in which independent businesses pay to become a franchise. Libava believes this may become a popular point of entry into franchising. “Since lenders are still looking for ways to turn down loans, those who apply for franchise loans that have an existing business in place, with existing revenue, will have a better chance of getting their loans approved,” he explains.

Overall Summary: “If a major franchise lobbying group like the International Franchise Association hasn’t had success in convincing lenders – via Congress to part with more money, who can?” says Libava. “Basically, the banks hold the money – and the bargaining power.”

Edith Wiseman, Executive Vice President of FRANdata, an independent franchise research company:

Wiseman believes that it will be possible to finance a franchise in 2011. That’s not to say, however, that it will be easy. “Banks are more liquid,” she says. “This should help make it easier. However, while there are positive signs in the economy, the data isn’t strong enough to ease credit standards.”

One notable point: Wiseman also expects to see proactive efforts from franchisors. “This year franchisors will put greater emphasis on growth,” she says. “Therefore, to achieve the growth targets, franchisors will need to step up and help both their prospective and existing franchisees obtain financing.”

Overall Summary: “Financing will continue to be challenging in 2011 because small business lending isn’t easy.”