Franchise lending shortfall robbing the nation of jobs, economic output

Lenders continue to fall shy of the overall loan volume sought by franchise business owners, a shortfall that’s holding back the recovery by choking job creation and economic production.


A dearth of franchise lending is expected to cost the economy about 94,000 jobs this year. (Asim Hafeez/BLOOMBERG)

“As a result of demand for more business units, there has been an increase in demand for new loans,” IFA Educational Foundation President John Reynolds said at the 2nd Small Business Lending Summit in Washington on Tuesday. “But unfortunately, lending hasn’t kept pace with the demand from franchise businesses.”

During a time when the economic recovery is still struggling to gather momentum, that 18.6 percent gap in loan demand and loan supply will rob the economy of an estimated 94,000 new jobs and $12.9 billion in gross domestic output in 2012, experts said. Contributing to the shortfall are factors like tighter credit standards, heightened regulatory scrutiny and uncertainty surrounding the tax code, according to the report, which was conducted by the the IFA in partnership with FRANdata.

The gap draws a distinction between the credit challenges facing franchises and those facing small businesses as a whole. Recently, an overwhelming majority (92 percent) of small firm owners reported either no problems securing loans or no need for a loan in response to a study published by the National Federation of Independent Business. Those findings were backed up in a recent Wells Fargo/Gallup survey, which showed that the number of small employers who believe credit will be hard to come by this year is on the decline.

“In the competition for limited credit, franchise businesses must prove credit worthiness by showing strong unit economics and system performance,” IFA President Steve Caldeira said in a statement. “With a still slow, uneven and sluggish economic recovery, coupled with a stricter regulatory environment as a result of Dodd-Frank, the pressure to maintain and create jobs has never been greater for franchisees, franchisors and the overall small business community.”

When they do manage to get their hands on the capital they need, franchise owners have proven themselves effective job creators. SBA Administrator Karen Mills, who also spoke at the summit on Tuesday, pointed to research that showed franchises create roughly 34 new jobs for every $1 million they receive in new loans.

“Two thousand franchises, 825,000 franchise units and 18 million people that you employ,” Mills said. “This is a real constant job creator, and it’s a great business model, an American business model. It’s really one of our competitive assets around the world.”

On the bright side, the overall health of the franchise industry appears to be improving and the gap between loans sought and loans acquired is growing smaller rather than larger. A year ago, lenders fell 19.6 percent short of franchise loan demand, and the year before, they missed the mark by 22.8 percent. Moreover, the IFA estimates nearly 36,000 new franchise units will be financed this year.

Hoping to accelerate that growth, the IFA on Tuesday announced an expanded partnership with the Financial Services Roundtable and the Consumer Bankers Association. The consortium has asked members of the administration and lawmakers in Congress to sit down with their respective members to address the current regulatory and lending hurdles facing franchises, small businesses and lending institutions.

Related: Veterans return from war, turn to franchising

Related: Qualified borrowers gaining negotiating power

Follow On Small Business and J.D. Harrison .

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.

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