The Dwyer Group recently set a record for monthly franchise sales. We are proud of this accomplishment and attribute the success to hard work, the strength of our brands, and the financing services we provide to prospective franchisees. However, as I talk to other franchise business leaders in my role as Chairwoman of the International Franchise Association, the overwhelming issue on their minds is how the current credit crunch is impacting franchise sales and what the IFA is doing to help ease the crunch.
Small businesses are important drivers of economic expansion. But, according to the IFA’s 2009 Franchised Businesses Economic Outlook, the current recession and the corresponding reduction in lending are preventing job creation and economic growth on Main Street. The 2009 Outlook is the IFA’s first-ever attempt to assess the U.S. economic impact of franchising in the future, rather than in the past, and will become one of the key research tools that we will fund and update on a regular basis.
The 2009 Outlook, conducted by PricewaterhouseCoopers, estimates franchise performance during 2009 in three key areas: total number of franchise establishments, total jobs, and total economic output. Based on the findings of the study, we estimate that total establishments will decline by 1.2 percent, total jobs will decline by 2.1 percent, and total economic output will decline by 0.5 percent.
While this is favorable compared to other industries and corporations in the current economy, it is the first time that franchising is expected to see declines in growth since we starting tracking the industry’s progress.
The major reason for the estimated declines is the lack of capital in the marketplace. And from my conversations with leaders across the country, these predictions are playing out as many franchise businesses and prospective franchise investors with strong credit histories have had loan applications denied. To quantify this, a new small business lending analysis, conducted by FranData for the IFA, will illustrate the significant impact that the lack of lending will have on franchise businesses and therefore on job creation and the economy.
The analysis shows that because of current conditions, we may see a 40 percent reduction in franchise lending in 2009. This reduction will result in the loss of tens of thousands of jobs and millions of dollars in direct and indirect economic activity.
Unlike previous recessions, this one is severe enough that we all need to take extraordinary steps to turn things around. To that end, the IFA has adopted an Economic Recovery Action Plan designed to help franchising leaders turn this challenge into an opportunity and position us to again lead the economic recovery.
A major part of the plan is an aggressive policy agenda, about which we are actively lobbying Congress and the new administration. Our message has been that while pumping money into government programs can help stimulate the economy, creating policies that get banks lending to small businesses is a more sustainable and less costly way to stimulate economic activity and create new jobs.
The IFA has urged President Obama to complete the work of restoring the secondary market for small business loans. However, we have warned that if the president’s $15 billion secondary market purchase plan is encumbered with strict rules, small business borrowers will be held hostage.
Congress and the president also need to send a strong signal to the small business lending market by making changes to Small Business Administration’s (SBA) policies to encourage more banks to begin lending to small businesses. For example, we recommend increasing the SBA 7(a) maximum loan limit from $2 million to $3 million and the maximum loan guarantee from $1.5 million to $2.7 million so that those small businesses that can create the most jobs can participate in the program.
We also recommend allowing pricing of SBA loans to be competitive with other forms of capital investment. Current SBA rate caps are set too low to encourage bank lending. In addition, we are encouraging a complete reversal of the new SBA policy on “goodwill” financing of business acquisitions and promoting reasonable audit standards so that banks have certainty that loan guarantees will be honored.
Other parts of the IFA Economic Recovery Action Plan include expanding our suite of services to our members, and adding discussion forums, online information centers, and webinars on topics like finance and development to help members through these challenging economic times. Dates and times of the sessions can be found at the IFA’s Web site.
Historical data show that during economic downturns, franchising fares well. In all major categories — economic output, establishments, job creation, and payroll — franchised businesses significantly outperformed nonfranchised businesses.
While we are confident that franchising will be, as it always has been, on the leading edge of the economic recovery both in the U.S and around the globe, the credit crunch is presenting unprecedented challenges. To help bust through this crunch we are stepping up our advocacy efforts in Washington with one overriding message: Congress and the Obama administration must take the necessary steps to improve small business lending practices so that franchise business can do what they do best — create jobs and economic activity in communities all across this great nation.
For franchisors, getting back to basics is the call to action during this time of economic uncertainty. Read a quick overview of these B-A-S-I-Cs.
Dina Dwyer-Owens is chairwoman of the International Franchise Association and chairwoman and CEO of The Dwyer Group.