Tight Credit Is Turning Franchisers Into Lenders
Published: June 9, 2010
Tami Chappell for The New York Times
If you own a franchise, are you an entrepreneur?
Mr. Tessier had owned a liquor store for nearly a decade. He had a good credit score and a solid track record as a businessman in central Georgia. He assumed lenders would be happy to help. “I went to several banks and they acted like they could do loans,” Mr. Tessier said. “But when it came down to it, it was ridiculous. Ultimately, the terms and conditions were just outrageous.”
So Mr. Tessier turned to another source of capital, his franchiser. He financed the $250,000 cost of opening his pizza restaurant though a leasing program established by Marco’s Pizza to help franchisees unable to obtain traditional loans. The case is one example of a trend that is rattling the chains of franchising: facing a $3.4 billion credit shortfall, franchisers are trying to spur growth by offering franchisees new financing approaches and incentives.
“When you talk to anybody in the franchising industry, financing is the No. 1 concern,” said Sean Fitzgerald, vice president for franchise development at Wireless Zone, a cellphone retailer that has introduced in-house financing programs to cover part of its franchise fee and opening costs. “And it’s not going to get better anytime soon.”
Chains are facing the worst credit squeeze since the franchise model boomed in the years after World War II. This year, the franchise industry is expected to seek $10.1 billion in capital, but banks are expected to lend only $6.7 billion, according to the International Franchise Association.
The big national companies that dominated franchise lending before the 2008 collapse have stopped or reduced financing. The remaining lenders — often local banks — have been more restrictive in their credit underwriting, and they have been demanding more collateral (like home equity), more cash liquidity, more experience in the industry and outside sources of income, like rental income or a working spouse.
“Banks have hit the reset button,” said Reginald Heard, president and chief executive of Bankers One Capital, a company in Danbury, Conn., that specializes in financing franchises. “They’re just holding onto capital and being conservative on how they approach new deals going forward. The franchisee who left I.B.M. and now wants to open a Dunkin’ Donuts or Subway, those deals are a lot more challenging to get done.”
Robert C. Seiwert, senior vice president of the American Bankers Association, said the tighter credit standards affected first-time franchisees in particular (especially those trying riskier ventures like restaurants). Beyond the concerns about lacking collateral, experience and cash flow, lenders are often wary of franchisees who are unable or unwilling to make a large equity investment in their business. And lenders are likely to be especially cautious with newer chains that lack a track record.
That is why the franchisers are getting involved, Mr. Seiwert said. “Financing for franchisees has always been tough,” he said. “But in today’s economy, it’s even tougher.”
Some franchisers have gone a step further and put their own balance sheets to work by creating captive financing programs, pooled credit support or leasing programs. Others have tried “credit enhancement” in which the franchiser guarantees part of a loan to encourage tight-fisted lenders to free capital. Some franchisers are submitting themselves to the bank credit report process — essentially getting their credit-risk language translated into banking terms — so that franchisees have a lender-friendly package ready to take to banks that might have never seen a loan application from a particular chain.
Besides financing, many franchises have also taken steps to help potential franchisees by reducing fees, waiving royalties or reducing square-footage requirements. Whatever the tactic, the motive is the same: playing a more active role in helping franchisees gain access to capital. “We had to get into the financing space to be able to deliver a solution to our franchisees,” said Peter Taunton, founder and chief executive of Snap Fitness, a national gym chain based in Chanhassen, Minn.
Marco’s Pizza is one of the most aggressive franchisers. A 200-store chain based in Toledo, Ohio, Marco’s has ambitions to grow fivefold in the next five years. Those plans — which will require $100 million in capital — ran into a major roadblock when banks curtailed lending. So Marco’s has introduced three financing programs.
It assembled a group of investors and created a $5 million private equity fund for new pizzerias and invests up to $100,000 per restaurant. It formed a subsidiary called Marco’s Assurance that provides a limited guarantee of bank loans to its franchisees and pays to relocate stores that end up in bad locations. It also has a leasing program that will finance up to $200,000 in opening costs. “Any small businessman is going to be very challenged getting financing without franchiser assistance,” said Ken Switzer, chief financial officer of Marco’s Franchising. “It’s virtually impossible on their own, without our help.”
That is what Remi Tessier found. After 10 years in the liquor business and four children, he had decided he wanted to switch to a more family-friendly business. Pizza seemed a good bet because he thought it was recession-proof. At least that is what he thought until he tried to get financing.
A decade earlier, he had obtained a business loan for his liquor store with 10 percent down. When he decided to open a 1,600-square-foot Marco’s Pizza franchise in Warner Robins, Ga., he assumed he was a better candidate for a loan with $300,000 in the bank, $9,000 monthly income from the sale of his liquor store and a credit score around 800.
But Mr. Tessier said the lenders told him they had tightened policies and were willing to finance only the equipment for a five-year term. That would force him to reach into his own pocket for $150,000 for renovations, franchise fees and other expenses. “I thought it was going to be a cakewalk,” he said. “I was just shocked at how tough it was.”
So he turned to the franchisers of Marco’s Pizza and applied for its leasing and assurance programs. He financed the $250,000 cost of opening his store by putting 25 percent down and will repay the rest to his franchiser over eight years. “I was approved within a week,” he said. In April, he opened the first of three planned locations.
Few companies have been as aggressive as Marco’s. But Darrell Johnson, president and chief executive of FRANdata, a leading franchise analysis business, predicted that the tighter lending environment would impose a new form of natural selection on franchisers. Until recently, financing has been available to both poor performers and high performers, but it will increasingly favor the latter. To survive, he said, franchisers need to “think like bankers.”
“Banks are defining who can play and who can’t play on the basis of risk analysis,” Mr. Johnson said. The stronger franchisers “are going to survive and do well because they’re going to get access to capital,” he said. “But it’s going to require the performance of franchise systems to change to meet the standards that banks are requiring. It’s going to be a system-strengthening process.”
Senate Grapples With Tax and Safety Net Legislation
The Senate will continue trying this week to break a partisan logjam over a major package of tax changes and safety-net spending, including added unemployment benefits.
The Senate’s inability to advance the bill is a sign that the partisan discord in this highly competitive mid-term election year is causing legislative paralysis.
And a major impetus to complete the measure was removed last week when the Senate agreed on a six-month plan to prevent a steep cut in doctors’ Medicare fees.
A fear that older Americans could begin losing access to health care prompted the short-term deal, but some lawmakers may now feel less urgency to finish the broader bill.
The Senate may also take up a small-business lending measure. The House approved the small-business bill last week with just five Republicans voting in favor of it – a further sign of the hardening partisan divisions on Capitol Hill.
The House speaker, Nancy Pelosi of California, said the legislation, which would provide $30 billion for loans, is crucial to helping small businesses emerge from the economic downturn.
“Small businesses are the creators of jobs in our country, they are the creators of capital,” Ms. Pelosi said at a news conference on Thursday, where she also took a dig at Republicans for opposing it. “For too long now, the Republicans in Congress have favored Wall Street over Main Street.”
The House this week may push forward with a bill to rein in special interest groups by requiring more disclosure of their roles in paying for campaign advertising.
The bill is intended to counter a Supreme Court ruling allowing corporations and unions to pour money directly into campaign ads, a potentially big influence on races.
But the measure hit a snag last week after authors of it agreed to an exception for the National Rifle Association, one of the most powerful lobbying groups in Washington.
That prompted Democrats to extend the exception to other groups in hopes of securing more votes but they still seemed short. Most Republicans oppose the bill.
The House is also still working on a supplemental war spending bill approved by the Senate last month. Some House Democrats want to add money for schools and public safety, as a way of providing economic aid to state and local governments, prompting further debate about the nation’s mounting debt load.
“We are trying to pay for some of the things that are in the bill,” Ms. Pelosi said. “And when we get our pay-fors, we will proceed to the floor.”
Senate and House negotiators will also continue work on an ambitious overhaul of the nation’s financial regulatory system
The televised conference proceedings on that bill will resume on Tuesday and could be completed by the end of the week. Both chambers must approve the final bill.
Will Obama’s Small-Business Agenda Survive Congress?
By ROBB MANDELBAUM
It was late October when President Obama first called for measures to stabilize struggling small businesses. Then, in his State of the Union address in January, he emphasized the role small business would play in healing the nation’s wounded economy. But it is only now, eight months after that speech, that Congress finally seems ready to act. And the House and Senate are so far apart that it is not clear that they will be able to agree on a bill that contains more than just a few of the president’s ideas.
In a series of speeches, Mr. Obama has outlined a three-point agenda for rejuvenating small business. First, he sought to increase the size of loans guaranteed by the Small Business Administration and to open S.B.A. loans normally used for new real estate projects to refinancing existing commercial mortgages. Second, because local community banks are responsible for much of the lending to small firms, he proposed using the Troubled Asset Relief Program to lend money to small banks that could in turn be reloaned to small businesses. And the president suggested further tax cuts and other incentives specifically aimed at the small companies.
Congress did enact a tax incentive to encourage small-business investment and a tax credit for hiring workers, which was not restricted to small companies. But even though small business is notionally sacrosanct in Washington, finding consensus for the president’s broader agenda on Capitol Hill, even among members of his own party, has proved difficult. Representative Nydia Velázquez, chairwoman of the House Small Business Committee, did not endorse the president’s initial S.B.A. proposals, which would have raised loan limits on the S.B.A.’s most popular programs, to $4 million to $5.5 million, although she never explained why. In February, she openly criticized a second round of S.B.A. initiatives from the administration.
Meanwhile, community bankers reacted coolly to the idea of borrowing from TARP. “The unfortunate development in 2009 was that while both the administration and Congress wanted to put in place special TARP efforts to help small businesses, TARP became so badly stigmatized that it became impossible to get almost anyone to voluntarily participate,” said Gene Sperling, a counselor to Treasury Secretary Timothy F. Geithner who has been working on small-business issues.
An aide to a legislator involved in discussions about the lending fund acknowledged that the bailout was political poison. “The primary issue is, is the money going to come from TARP,” said the aide, who declined to be identified. “If not, does it look like TARP? Does it leave a TARP-like aftertaste? I don’t think anyone wants this to have a TARP-like aftertaste.”
As a result, Mr. Obama revised this proposal for the State of the Union address as a separate small-business lending fund. But this proposal, Mr. Sperling noted, requires Congress’s assent. “The reality is that it has just run up against an amazingly intense legislative calendar that has included not only extending vital economic recovery measures but two historic pieces of legislation — health care and financial reform — that are also critical for the economy.”
It took until early May to write the lending fund bill. The program would initially loan up to $30 billion to small banks at 5 percent interest, though banks that make additional small-business loans could have that rate drop to as low as 1 percent. Banks that do not make small-business loans would pay 7 percent. The administration also worked with legislators of both chambers to create a $2 billion program to finance state and local programs that help businesses get bank credit.
The House has moved first. In March, it passed a bill aimed at small companies with tax relief and passed a similar bill last week. It followed Thursday with a bill that included the president’s small-business lending fund and state assistance initiatives. But House leaders refused to allow amendments that would have added to the administration’s S.B.A. priorities. “Through this whole process,” said a senior Democratic aide in the House who declined to speak for attribution, “the administration worked very closely with the chairwoman of the House Small Business Committee. They came to an agreement, and that’s the bill that we’ve got. This is a product of consensus — everybody gave on this bill.”
The bill passed the House without a single Republican vote. Instead of stimulating the supply of credit, Republicans have argued for stimulating demand for credit by reducing the tax and regulatory burdens on small businesses.
Though Democrats tried to inoculate the lending fund with a legislative provision that specifically disassociates it from TARP, Republicans derided it as “TARP 3.0? and even tried to change the bill’s title to the “TARP Junior Act of 2010.” At the same time, Republicans professed concern that, as they wrote in a Financial Services Committee report, “banks could shun the program for fear of being stigmatized by its association with the TARP.”
Meanwhile, the Senate plans to unveil its own small-business bill in the next few days, according to Richard Carbo, a spokesman for the Small Business Committee. The legislation will comprise tax incentives and S.B.A. initiatives, he said, but senators have not decided whether to include the community bank and state lending programs. Senate leaders are worried the programs will not win bipartisan support, said Mr. Carbo and another Senate aide, who indicated these may have trouble winning over even moderate Democrats. Senator Mary Landrieu, chairwoman of the Small Business Committee, had not taken a position on the bill as of last week, said Mr. Carbo. But today, he said, “She is warming up to it.”
Her Republican counterpart on the committee, Senator Olympia Snowe of Maine, has had a major voice in shaping the Senate bill, in part because she is one of the few Republicans thought to be willing to support the legislation. The president’s proposals for raising S.B.A. loan limits closely followed Ms. Snowe’s own bills. However, her office repeatedly refused to say whether she would vote for a bill that also included a lending fund.
Bipartisanship will likely be hard to come by regardless of what the bill includes. In the House, Republicans opposed the tax bill that passed Tuesday, in part, they said, because its three very targeted tax increases on bigger businesses would more than offset the relief for small businesses. They also complained that the tax cuts didn’t go far enough.
“I think what the majority is laying out is kind of a happy life of low expectations,” said Representative Peter Roskam, a Republican from Illinois, during the debate over the bill. “This is so narrowly crafted and so de minimus and being proclaimed by the same folks that promised us great things in the stimulus that I think we can do better.”
“You say, ‘do better,’” retorted Sander Levin of Michigan, the chairman of the House Ways and Means Committee. “You won’t vote for anything.”
The bill passed 247 to 170. Only five Republicans supported it.
Should the Senate bill pass, it will have to be reconciled with the House’s legislation. If neither chamber prevails, Congress could wind up jettisoning both the S.B.A. proposals and the community bank and state lending programs, and passing only the tax incentives. These incentives could include making the gains on small-business stock acquired through next year tax-free, limiting penalties for violating tax shelter rules and increasing the deduction for start-up expenses to $20,000.
The administration is hopeful that it will get at least some of each part of its agenda, said Mr. Sperling: “There remains a solid commitment from the Congressional leadership to move a small-business jobs package that is broad and robust enough to at least include small-business tax relief, S.B.A. initiatives, and the president’s two small-business lending initiatives.”
Will Obama’s Small-Business Agenda Survive Congress?
By ROBB MANDELBAUM
It was late October when President Obama first called for measures to stabilize struggling small businesses. Then, in his State of the Union address in January, he emphasized the role small business would play in healing the nation’s wounded economy. But it is only now, eight months after that speech, that Congress finally seems ready to act. And the House and Senate are so far apart that it is not clear that they will be able to agree on a bill that contains more than just a few of the president’s ideas.
In a series of speeches, Mr. Obama has outlined a three-point agenda for rejuvenating small business. First, he sought to increase the size of loans guaranteed by the Small Business Administration and to open S.B.A. loans normally used for new real estate projects to refinancing existing commercial mortgages. Second, because local community banks are responsible for much of the lending to small firms, he proposed using the Troubled Asset Relief Program to lend money to small banks that could in turn be reloaned to small businesses. And the president suggested further tax cuts and other incentives specifically aimed at the small companies.
Congress did enact a tax incentive to encourage small-business investment and a tax credit for hiring workers, which was not restricted to small companies. But even though small business is notionally sacrosanct in Washington, finding consensus for the president’s broader agenda on Capitol Hill, even among members of his own party, has proved difficult. Representative Nydia Velázquez, chairwoman of the House Small Business Committee, did not endorse the president’s initial S.B.A. proposals, which would have raised loan limits on the S.B.A.’s most popular programs, to $4 million to $5.5 million, although she never explained why. In February, she openly criticized a second round of S.B.A. initiatives from the administration.
Meanwhile, community bankers reacted coolly to the idea of borrowing from TARP. “The unfortunate development in 2009 was that while both the administration and Congress wanted to put in place special TARP efforts to help small businesses, TARP became so badly stigmatized that it became impossible to get almost anyone to voluntarily participate,” said Gene Sperling, a counselor to Treasury Secretary Timothy F. Geithner who has been working on small-business issues.
An aide to a legislator involved in discussions about the lending fund acknowledged that the bailout was political poison. “The primary issue is, is the money going to come from TARP,” said the aide, who declined to be identified. “If not, does it look like TARP? Does it leave a TARP-like aftertaste? I don’t think anyone wants this to have a TARP-like aftertaste.”
As a result, Mr. Obama revised this proposal for the State of the Union address as a separate small-business lending fund. But this proposal, Mr. Sperling noted, requires Congress’s assent. “The reality is that it has just run up against an amazingly intense legislative calendar that has included not only extending vital economic recovery measures but two historic pieces of legislation — health care and financial reform — that are also critical for the economy.”
It took until early May to write the lending fund bill. The program would initially loan up to $30 billion to small banks at 5 percent interest, though banks that make additional small-business loans could have that rate drop to as low as 1 percent. Banks that do not make small-business loans would pay 7 percent. The administration also worked with legislators of both chambers to create a $2 billion program to finance state and local programs that help businesses get bank credit.
The House has moved first. In March, it passed a bill aimed at small companies with tax relief and passed a similar bill last week. It followed Thursday with a bill that included the president’s small-business lending fund and state assistance initiatives. But House leaders refused to allow amendments that would have added to the administration’s S.B.A. priorities. “Through this whole process,” said a senior Democratic aide in the House who declined to speak for attribution, “the administration worked very closely with the chairwoman of the House Small Business Committee. They came to an agreement, and that’s the bill that we’ve got. This is a product of consensus — everybody gave on this bill.”
The bill passed the House without a single Republican vote. Instead of stimulating the supply of credit, Republicans have argued for stimulating demand for credit by reducing the tax and regulatory burdens on small businesses.
Though Democrats tried to inoculate the lending fund with a legislative provision that specifically disassociates it from TARP, Republicans derided it as “TARP 3.0? and even tried to change the bill’s title to the “TARP Junior Act of 2010.” At the same time, Republicans professed concern that, as they wrote in a Financial Services Committee report, “banks could shun the program for fear of being stigmatized by its association with the TARP.”
Meanwhile, the Senate plans to unveil its own small-business bill in the next few days, according to Richard Carbo, a spokesman for the Small Business Committee. The legislation will comprise tax incentives and S.B.A. initiatives, he said, but senators have not decided whether to include the community bank and state lending programs. Senate leaders are worried the programs will not win bipartisan support, said Mr. Carbo and another Senate aide, who indicated these may have trouble winning over even moderate Democrats. Senator Mary Landrieu, chairwoman of the Small Business Committee, had not taken a position on the bill as of last week, said Mr. Carbo. But today, he said, “She is warming up to it.”
Her Republican counterpart on the committee, Senator Olympia Snowe of Maine, has had a major voice in shaping the Senate bill, in part because she is one of the few Republicans thought to be willing to support the legislation. The president’s proposals for raising S.B.A. loan limits closely followed Ms. Snowe’s own bills. However, her office repeatedly refused to say whether she would vote for a bill that also included a lending fund.
Bipartisanship will likely be hard to come by regardless of what the bill includes. In the House, Republicans opposed the tax bill that passed Tuesday, in part, they said, because its three very targeted tax increases on bigger businesses would more than offset the relief for small businesses. They also complained that the tax cuts didn’t go far enough.
“I think what the majority is laying out is kind of a happy life of low expectations,” said Representative Peter Roskam, a Republican from Illinois, during the debate over the bill. “This is so narrowly crafted and so de minimus and being proclaimed by the same folks that promised us great things in the stimulus that I think we can do better.”
“You say, ‘do better,’” retorted Sander Levin of Michigan, the chairman of the House Ways and Means Committee. “You won’t vote for anything.”
The bill passed 247 to 170. Only five Republicans supported it.
Should the Senate bill pass, it will have to be reconciled with the House’s legislation. If neither chamber prevails, Congress could wind up jettisoning both the S.B.A. proposals and the community bank and state lending programs, and passing only the tax incentives. These incentives could include making the gains on small-business stock acquired through next year tax-free, limiting penalties for violating tax shelter rules and increasing the deduction for start-up expenses to $20,000.
The administration is hopeful that it will get at least some of each part of its agenda, said Mr. Sperling: “There remains a solid commitment from the Congressional leadership to move a small-business jobs package that is broad and robust enough to at least include small-business tax relief, S.B.A. initiatives, and the president’s two small-business lending initiatives.”
