The number of franchises in the U.S. has risen by about 65 percent in just the past five years, and this segment of the small-business landscape represents a fertile area for loan growth that largely has gone untapped.
Only a handful of banks are beginning to seek out these business owners, but they are in the minority.
The number of franchises in the U.S. has grown from about 1,500 to 2,500 since 2003, according to the International Franchise Association. Moreover, franchising is seeing a 10 percent to 12 percent growth rate annually. And while roughly 40 percent of the franchisors offer some independent loans to their franchisees, those funds usually don’t close the financing gap. To date, the bulk of the financing business is dominated by non-bank lenders like CIT or GE Money, instead of banks, says Terry Hill, spokesman for the franchise association. CIT did not return phone calls. GE Money could not be reached.
For banks’ participation in this arena, franchisee loans are often wrapped into their small-business-loan portfolio. And as such, they comprise only between 1 percent and 3 percent of the total, estimates Paul Merski, an economist at the Independent Community Bankers of America. He agrees these loans are a potentially large growth area for banks, especially if executives developed the right methodology to extend them to the correct people.
Terry Jorde, president of $40 million-asset CountryBank USA in Cando, ND, agrees that franchisee loans are attractive for banks because of the nature of the franchising business. The franchisee already has a leg up on the traditional small business, in terms of creditworthiness. His franchise usually receives automatic name recognition and benefits from the franchisor’s ongoing advertising campaigns, as well as access to occasional management-training classes.
Jorde, for example, just completed a loan for a fast-food restaurant that she declined to identify, which she said was “easy” because the owners, who had never run a small business before, were receiving these franchisor benefits.
Franchise loans can also offer diversity to lenders. There are 18 different industries tracked by the international association. Fast food is by far the biggest industry among franchisor, accounting for nearly one-third of all franchises. But maintenance (10 percent), retail (9 percent) and general service (10 percent) also account for a sizeable portion of the mix, according to association statistics. Within those 18 industries, there are 230 sectors. The fastest-growing sectors were window cleaning and handyman services, which increased 260 percent and 247 percent, respectively, between 2003 and 2006.
One small regional bank that has pursued these loans is $2.2 billion-asset Home Bancshares in Conway, AR. The bank supplies lines of credit to a specialty-finance company, Franchise Finance, which makes loans to franchisees.
Bank officials did not respond to phone calls, but Rick Anderson, general manager at Franchise Finance, says the firm typically offers loans in the $200,000 to $1 million range. He said he expects the franchising business to be strong at least until late 2008. Usually, franchising is counter-cyclical to the overall economy, he says. When the economy is soft, people are more inclined to start a franchise. “In the 1990s, things got tight, everyone was working … but when the dot-coms went bust, and people had golden parachutes, and interest rates were low, that was the Holy Grail,” he says.
Hill said that his association has financial partners to help franchisees obtain financing; those vendors include banks and non-banks alike.
