Hey Obama, Where Has All of the Money Gone?

A lot was written by my fellow bloggers regarding the state of the country under Obama’s 365 days of leadership. Many topics were covered when looking at small businesses -- the challenges and opportunities. With my focus being franchising, I thought I’d share my two cents on the financing problems small business owners have faced over the past several years.

Now, let me now first say that I voted Democrat. But as an entrepreneur myself, I’ve started to reconsider this position – health care, financing, taxes, the war have all made me start to listen to the GOP’s positions too. More on this in a future post.

Back to franchise financing. It’s no secret that 2009 was a slow growth year for many franchise concepts. The economic meltdown greatly affected entrepreneurs seeking funding to start their own business. The International Franchise Association released a study from PricewaterhouseCoopers early last year detailing their predictions and they were dismal. Job losses, fewer openings, lower economic output. All very bad signs of what was to come in 2009.

Well, the predictions were right. Last year was a bad year. The IFA released a new study earlier this year with a much brighter outlook -- however, I’m not sure why. The financial markets (well, except the stock markets) are still performing poorly. Banks are not lending -- at least not without 30-50 percent down -- and businesses are doing deals but very slowly.

Among my peers in the industry, we pontificate why this is the case. Our best guess is the franchise industry’s optimism. It just can’t get any worse, right?

Well, it’s not getting any better. The Obama Administration has announced several small business lending programs over the past year or so. None have seemed to make any progress driving more franchise agreements. The Administration has increased the guarantee on SBA loans, laid out plans for community banks to increase lending to small businesses, but still not much has changed.

The real question we should be asking is, “Is the Administration our solution?” One might say no. Now, I don’t plan to rant and rave about the government staying out of our lives, but we - fellow small business owners - have to control our own destiny.

This means that franchisors MUST find funding resources for their franchisees and be prepared to present the strength of their business to lenders.

Thankfully, more and more franchise concepts have begun to add Financial Performance Representations to their Franchise Disclosure Documents (FDDs). These FPRs are critical for systems to secure financing, but they are not the only tool that’s needed. Franchisors must also begin to network with local community lenders in the markets they want to expand their footprint. Educating all types of lenders on the strengths of their concepts is critical. When a bank considers a loan application, it is looking at the franchisor for a clear indication of the company’s ability to succeed. If this is not done, the prospective franchisee has nearly zero chance in getting money.

Another tool that franchises need to develop is creating their own lending sources for prospects - like Edible Arrangements and Firehouse Subs - or create new and innovative partnerships with lenders. They must take control of their future growth. These two companies have created their own financing companies to fuel development among existing franchisees. These are franchisees that have proven to be strong operators. Growth from within - with a little help from the franchisor - has begun to show rewards. More companies need to consider these programs to grow.

Financial innovation is necessary.

I’ll keep an eye on new developments in this area and continue to share my thoughts. What’s your solution to ignite franchise sales this year? I’m interested to hear additional ideas.

In the meantime, optimism is still strong as we enter the second quarter, but how long will it last?