Tighter lending rules make it tougher for some franchise entrepreneurs to launch

Boulder-based Camp Bow Wow is adding locations across the country at a steady clip, but the company’s owner says the growth would be much stronger if more of her franchisees could get loans. “We probably get 500 leads a month, but maybe 10 can qualify for an SBA-backed loan,” said Heidi Ganahl, referring to the Small Business Administration​ guaranteed-loan program. “If we had adequate capital, we would be growing at an incredible rate right now.”

Three years into a halting economic recovery, many small businesses and would-be entrepreneurs continue to struggle with tight access to financing. Nowhere is the problem more acute than in franchising, where growth has been checked by the inability of many potential franchisees to obtain bank loans, say industry experts and franchise businesses.

“There’s a hunger for franchising in this economy, but access to credit has really stymied the opportunity for people to be able to go in and create their own businesses,” said Michael Haith, co-founder and principal of Greenwood Village-based Franchise Sherpas, which consults with franchisers and makes investments to help them grow.

“There’s got to be some recognition that loosening credit in a healthy manner will boost the economy faster than anything else,” said Haith, who started the Maui Wowi Fresh Hawaiian Blends franchise chain.

The International Franchising Association says lending to franchisees this year is about 20 percent short of demand. The association says each $1 million in loans made to franchises creates 40 jobs.

Ganahl said that about 25 percent of potential Camp Bow Wow franchisees qualified for SBA-guaranteed bank loans in 2008 but that the number has fallen to less than 5 percent as banks require more money down and more collateral.

That’s one reason the company’s growth has slowed to about 15 new locations this year (and an expected 20 next year) from about 70 in 2007, she said. Demand for the company’s upscale dog-care services has continued to climb through the downturn, she said. There are 115 Camp Bow Wows, making it the largest company of its kind, and international expansion is being planned, Ganahl said.

PricewaterhouseCoopers has forecast that the number of U.S. franchises would increase 2.5 percent this year, but that was based on a GDP growth forecast of 3 percent. So far this year, GDP has grown at 1.4 percent. Last year, franchises grew just 0.3 percent, and they fell 3.6 percent in 2009.

The SBA says that despite more stringent lending standards, it backed a record dollar amount of loans during the fiscal year that ended Sept. 30. SBA-backed loans peaked in 2007, plummeted in 2008 and 2009, and started climbing back in 2010.

The agency attributed the jump in 2011 in part to a temporary increase in the amount of its guarantees on bank loans to 90 percent from 75-85 percent. The number of loans, however, remains well below 2007 levels, indicating that a smaller group of businesses is getting bigger loans and that financing remains out of reach for others.

Of its lending criteria, the SBA says on its website: “Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral and owner’s equity contribution are also important considerations.”

Banks and even some small-business groups such as the National Federation of Small Businesses say that diminished consumer spending is the main force constraining loans to small businesses, many of which don’t want to expand and take on more debt until the economic outlook improves.

A rising default rate by small businesses during the downturn is a big reason banks have raised their lending standards. Still, in an economy where many of those who are trying to launch a new enterprise are unemployed, loans can be impossible to get.

Bob Ireland, who opened a Max Muscle Sports Nutrition franchise in east Centennial in September, said he didn’t spend much time applying for a bank loan because his income was limited. Instead, working with a franchise consultant, the retired United Airlines engineer and manager opened 15 credit-card accounts and used them to borrow more than $150,000. Spotless credit helped, he said. Ireland paid no interest for the first six months, but now the cards are charging 13-15 percent.

“It’s a great motivator to pay those off as quickly as possible,” he said. “I’m satisfied that the potential for success is high. It’s not without risk, but it’s risk I’m willing to accept.” Still, he said, “I had never in my life taken cash advances from my credit card. That makes this a little unsettling.” Ireland said Max Muscle’s strong presence in the Denver area and its loyal clientele have helped his shop exceed expectations so far.

One result of tight financing is that banks have gotten pickier with the business experience they require, Ganahl and other franchisers said. Qualified franchisees typically have experience running a business or high-level corporate experience, they said. That, combined with the economy, has propelled more highly educated former managers and executives into franchising.

Many large franchisers are helping franchisees find loans, and some hire services to match franchisees with lenders. Others are finding financing however they can. Nicholas Stadlin and his father, Alex, bought two existing Camp Bow Wow franchises in Colorado Springs in January. The seller helped finance the sale, Stadlin said. “We worked out a deal with the previous owner so that we didn’t have to take out a loan,” he said. “That made a huge difference.”

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SOURCE: The Denver Post