What Can Franchising Expect from Lenders in 2011?

by Ed Teixeira

There has been a good deal of optimism expressed in recent weeks regarding projected franchise growth in 2011. Some of this optimism is based upon the anticipated increased availability of capital for franchisees. This article presents a brief overview regarding small business lending in 2011.

As credit has tightened over the past two years, it has had a noticeable effect on the franchise industry. Lenders, especially banks, have put constraints on franchisee loans. This has made it difficult for franchisees seeking capital to grow. It has made it more difficult to purchase equipment, real estate and add employees. It also makes it difficult  for some individuals to start new franchise companies.

During his last State of the Union, President Barack Obama promoted the $30 billion Small Business Lending Fund designed to boost small business lending.  According to industry sources, outstanding loans to small businesses have declined 5 percent, or nearly $36 billion, since 2008, according to data from bank regulatory filings. They continued to drop through the first three quarters of 2010 by another 4 percent, some $30 billion.

From the Treasury Department

The money from the Small Business Lending Fund is about to start flowing, with investments expected to be made in the first quarter, according to Jason Tepperman, the Treasury program's director. The fund offers community banks capital that becomes cheaper as they increase their lending to small businesses.  Tepperman won't say how many applications Treasury has received since it started accepting them in December 2010, although he said he was "pleasantly surprised" by how strong the response was. Banks have through the end of March to apply, and the Treasury will award funds on a rolling basis. Although Congressional summaries suggested banks would lend out $10 for every dollar in new capital they received—meaning the $30 billion in the fund would result in $300 billion in new loans—Treasury officials declined to estimate how much the program would actually increase small business lending.

Banks with assets of less than $10 billion are eligible to apply for the Small Business Lending Fund. According to the Treasury: "For institutions that have an interest in increasing their small business lending, they're likely to find this an attractive opportunity to refinance" TARP capital, says Tepperman. Banks generally pay Treasury an annual dividend of 5 percent for TARP investments (which take the form of preferred shares in the banks). Increasing small business lending even 2.5 percent would lower that cost under the new program.

The Small Loan Advantage and Community Advantage from the SBA

The SBA has introduced the Small Loan Advantage and Community Advantage. The SBA is confident that these two new initiatives will increase the amount of loans to those businesses in need of smaller business loans and loans to under-served communities. These two new initiatives build off the SBAs “Advantage” platform and will offer a streamlined application process for SBA 7(a) loans up to $250,000.

•  The Small Loan Advantage Program is structured to encourage larger, existing SBA lenders to make smaller loans, with a maximum loan size of $250,000 to businesses in under-served markets.
•  The Community Advantage Program is designed to assist communities that have been under-served by working with financial institutions with lending experience in economically-challenged markets. These lenders would also have management and technical assistance expertise.

Banking insiders say that smaller banks have been hesitant about loaning money; however, with the implementation of these programs with guarantees in place lenders can be less concerned about high default rates. These new programs could deliver money to borrowers somewhat faster, enabling them to apply the capital quicker.

U.S. Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Chairman Sheila Bair took part in a recent panel discussion.

FDIC Chairman Sheila Bair agreed that the situation for small business lending has improved.

“We think it is turning. Most banks are profitable again. They are working through their troubled loans. We have lower rates of delinquencies and charge-offs. There is a lot beyond our control but if things continue as they are, it’s slowly getting better and I think you will see lending activity pick up,” she said

“Overall it’s still a very tight situation, but things have stopped getting worse and are looking a little better,” said Federal Reserve Board Chairman Ben Bernanke. Insurance Corp. “We are at a position where we are starting to get some improvement. I think 2011 will be a better year for small-business lending.”

These programs will hopefully result in the availability of more capital for franchisees and those looking to start new franchise companies.

 © 2010 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com