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
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
- 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
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
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
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