Uncertainty in the overall economy in the past four years has created new challenges for many franchise systems focusing on unit growth. The ability to attract access to capital for its system operators at sustainable levels and to support system growth at all levels became and remains one of the top priorities for the brand leadership at many franchise systems.
It is essential for a franchise system to build a successful brand and to sustain its overall system growth to attract lenders that can provide continuous viable options to finance most of its system operators' projects. The overall industry benefits from a banking system that has a strong working knowledge about franchise business models, understands how to effectively underwrite the related credit risk on both the brand system and operator levels, and is active in the market to fund a broad range of franchise type projects and its system operators.
The development goals and system growth of franchise systems call for funding in such areas as new store development, transfers/resale units, unit expansions, store remodels, new equipment purchases, upgrades and working capital facilities to support ongoing operations. To attract a healthy network of lenders, a franchise system's growth trajectory is equally correlated to its ability to attract and retain qualified system operators with diverse backgrounds on the personal financial and skilled experience levels. System growth continuity and maintaining a competitive advantage are influenced by many factors. One of the most significant factors is the system's ability to attract competitive capital access from outside lenders with the capacity and willingness to offer conventional loan options to their more experienced and financially stronger operators, as well as Small Business Administration-backed loan options as funding solutions.
As the new economy continues to be redefined following this severely recessionary cycle, banks and lending institutions that successfully weathered the storm have since emerged well capitalized. They are now best positioned to make new loans to franchise system operators that support their business models and growth strategies. Also, this well-capitalized base of lenders with the capabilities and willingness to underwrite the franchise business projects are broad based in nature. Many of these lenders, including national, regional and community banks, credit unions, and non-bank specialty finance companies, continue to participate in the SBA loan programs. As a result, they are returning to the market actively seeking qualified projects and borrowers. Similarly for those well-capitalized lenders that provide non-SBA loans, but traditional term loans, equipment leases and loans, and working capital facilities have also returned to the market seeking qualified projects and borrowers. The operative word for both groups of lenders is how they internally define and what they consider to be "qualified projects and borrowers."
Despite the total number of well-capitalized lenders in the market, the franchise industry continues to experience a historical gap of approximately more than $3 billion between total loan demand for overall capital needs and the supply of capital to meet total demand. Although the demand and supply gap will narrow as the economy continues to show signs of improvement and market conditions for lender competition improve, under current conditions, lenders continue to extend business credit under tighter internal credit underwriting standards and under a heavy external "risk adverse" regulatory environment. Another significant challenge is that these well-capitalized lenders are decentralized and a significant number of them have either minimal or no prior experience in underwriting franchise business projects coupled with the greater industry knowledge limitation to the broader base of franchise systems.
It's has been well communicated that the franchise industry is a representation of the country's small businesses and that approximately every $1 million added to franchise lending supports an estimated 40.4 total jobs and generates an estimated $4.2 million in annual economic impact.
The current market conditions and the continuous heightened awareness about opportunities to finance franchise type projects by the franchise industry to the banking industry makes for the perfect timing for franchise systems to fully evaluate their internal systems and determine if the system is "lender ready." It has become common practice for many banks and specialty finance companies to become fully educated and to qualify the overall systemic risk and system performance history before making any consideration to underwrite a specific operator or transaction request. To manage credit underwriting risk, experienced and nonexperienced lenders for franchise type transactions, as credit management tools, lenders are reviewing, but not limited to a copy of the system's franchise disclosure document, a FRANdata independently prepared Bank Credit Report, the SBA Franchise Registry status, the SBA performance history data, industry sector analysis, and any internal loan performance data on the system, if available.
