The difficulty of getting startup or expansion capital has been a recurring theme in the franchising industry in the past year. But despite the challenges, recent studies show that franchised businesses still have a better chance of finding financing than do independents.
“Franchises have been far from insulated from the recession, but overall they have performed better,” says Jonathan Maze, an editor at Franchise Times, a magazine that covers franchising.
Franchises have some advantages over independent businesses, and it’s very likely they will outgrow their non-franchise rivals this year. Franchises are typically better positioned than mom-and-pop shops to survive downturns, benefiting from a strong brand presence, corporate-wide marketing campaigns and access to advice and mentoring from the franchisor. Plus they can often offer customers — and get from suppliers — steeper price discounts.
In fact, 60 new franchise brands were added in the last quarter of 2009, while many other small businesses suffered. Darrell Johnson, president and CEO of independent research firm FRANdata, told Kiplinger.com, “Given the big drop in the economy in ’09, these numbers are pretty good.”
Johnson predicts that one in every five dollars in SBA guaranteed loans made this year will likely go to a franchise. “Generally, bankers tend to perceive franchises as less of a risk. There’s a greater willingness to lend to them.” Typically, Johnson adds, loans to franchisers are larger than loans made to independents.
That doesn’t mean getting franchise financing is simple. FRANdata’s 2010 Economic Forecast predicted that while franchising will see positive growth this year, getting capital will remain the biggest challenge.
If you’re a potential franchisee seeking a loan understand that lenders will be asking more questions about things like the franchisor’s management team, store closures and unit revenues. They will also assess the franchise industry as a whole and the particular franchisor’s brand and reputation.
To help the process, franchisors need to develop relationships with local lenders, learn to speak bankers’ language and work with franchisees to help them obtain loans. Hopefully, as the economy continues to pick up, and funds will become more readily available and feed further franchise expansion.
Rieva Lesonsky is founder and president of GrowBiz Media, a content and consulting company that helps entrepreneurs start and grow their businesses. Follow Rieva on Twitter @Rieva. Visit SmallBizDaily.com to read more of Rieva’s insights on small business and to buy her newest book, Marketing 101: Quick Tips for Marketing Your Business.