Franchise lending on a steady upswing

April 17, 2012

Franchise lending has steadily increased throughout the past 12 months, according to the new monthly Franchise Lending Index from the International Franchise Association (IFA) and BoeFly, an online marketplace connecting small business borrowers with lenders.

According to the data, throughout the past two years, lending showed the steepest increase from November to December 2010, when lending to franchise businesses rose by 20.54 percent. This increase was largely attributed to SBA stimulus from the American Recovery and Reinvestment Act of 2009 (ARRA), which allotted $730 million in SBA loans.

The upward trend was followed by a sharp 28.78 percent decrease from December 2010 to January 2011 as franchise lending reverted back to its financial crisis levels following the impact of government stimulus.

According to the Index, franchise lending experienced a growth of 10.56 percent between February 2011 and February 2012. Despite the net 12-month gain, the period was variable with as many months seeing expansion as retraction.

"The Index confirms that access to credit in the franchise industry has achieved relative stability, a non-trivial achievement in the wake of the financial crisis," said Mike Rozman, co-president of BoeFly. "In developing the current Index, we explored how borrowers were using credit to establish new franchise units or to refinance existing debt."

In the first two months of 2012, there was a shift in the direction away from new development: in February, 42.7 percent of loans approved by dollar amount for franchises was used to fund new businesses, whereas January experienced 54.9 percent of credit went to new entities.

"Franchise owners continue to take advantage of record low interest rates to shore up their balance sheets. And, although those seeking more short-term job growth are likely disappointed that a greater percentage of financings aren't going to fund new formations, we are encouraged that franchise owners are better positioned for current profitability and therefore future, more secure growth," Rozman said.

However, while franchise businesses are experiencing more access to capital, the industry continues to face a shortfall in lending that has limited growth and job creation, said Steve Caldeira, IFA president and CEO.

The Index was announced today at the Small Business Lending Summit, a meeting of franchising, finance and policy leaders.

The IFA/BoeFly Franchise Lending Index is created from a monthly analysis and integration of both proprietary data from BoeFly's marketplace and franchise loan data from the Small Business Administration (SBA). The Index is an initiative of the strategic alliance between the IFA and BoeFly announced earlier this year.

Read more about franchising and growth.

Topics: Financing and capital improvements , Franchising & Growth , Operations Management , Trends / Statistics

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