Franchise lending shortfall robbing the nation of jobs, economic output

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Lenders continue to fall shy of the overall loan volume sought by franchise business owners, a shortfall that’s holding back the recovery by choking job creation and economic production.

New lending to franchises will total $9.5 billion this year, according to new data released by the International Franchise Association. While that’s up slightly from 2011, it falls well short of the $11.72 billion those franchise owners will seek in loans over the course of 2012.

“As a result of demand for more business units, there has been an increase in demand for new loans,” IFA Educational Foundation President John Reynolds said at the 2nd Small Business Lending Summit in Washington on Tuesday. “But unfortunately, lending hasn’t kept pace with the demand from franchise businesses.”

During a time when the economic recovery is still struggling to gather momentum, that 18.6 percent gap in loan demand and loan supply will rob the economy of an estimated 94,000 new jobs and $12.9 billion in gross domestic output in 2012, experts said. Contributing to the shortfall are factors like tighter credit standards, heightened regulatory scrutiny and uncertainty surrounding the tax code, according to the report, which was conducted by the the IFA in partnership with FRANdata.

The gap draws a distinction between the credit challenges facing franchises and those facing small businesses as a whole. Recently, an overwhelming majority (92 percent) of small firm owners reported either no problems securing loans or no need for a loan in response to a study published by the National Federation of Independent Business. Those findings were backed up in a recent Wells Fargo/Gallup survey, which showed that the number of small employers who believe credit will be hard to come by this year is on the decline.

“In the competition for limited credit, franchise businesses must prove credit worthiness by showing strong unit economics and system performance,” IFA President Steve Caldeira said in a statement. “With a still slow, uneven and sluggish economic recovery, coupled with a stricter regulatory environment as a result of Dodd-Frank, the pressure to maintain and create jobs has never been greater for franchisees, franchisors and the overall small business community.”

When they do manage to get their hands on the capital they need, franchise owners have proven themselves effective job creators. SBA Administrator Karen Mills, who also spoke at the summit on Tuesday, pointed to research that showed franchises create roughly 34 new jobs for every $1 million they receive in new loans. 

“Two thousand franchises, 825,000 franchise units and 18 million people that you employ,” Mills said. “This is a real constant job creator, and it’s a great business model, an American business model. It’s really one of our competitive assets around the world.”

On the bright side, the overall health of the franchise industry appears to be improving and the gap between loans sought and loans acquired is growing smaller rather than larger. A year ago, lenders fell 19.6 percent short of franchise loan demand, and the year before, they missed the mark by 22.8 percent. Moreover, the IFA estimates nearly 36,000 new franchise units will be financed this year.

Hoping to accelerate that growth, the IFA on Tuesday announced an expanded partnership with the Financial Services Roundtable and the Consumer Bankers Association. The consortium has asked members of the administration and lawmakers in Congress to sit down with their respective members to address the current regulatory and lending hurdles facing franchises, small businesses and lending institutions.

Article by J.D. Harrison, posted April 18, 2012 on www.washingpost.com.  See original article here.

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Will the JOBS Act help small business?

JOBS Act clears Senate, back to House for final passage

A bipartisan effort to make it easier for smaller businesses to access investment cash was back on track after clearing the Senate, but not without grave warnings from opponents who insisted it would open the door to a new era of fraud.

Senators added a provision that would bolster investor protections on the emerging practice of crowd-funding – soliciting pools of investors online and from social media. The bill passed overwhelmingly, 73-26, but broader efforts to amend it had been turned back by GOP-led opposition.

President Obama has given the measure qualified support, and it now returns to the House where GOP leaders expect swift passage, sending it to the White House next week as a rare bipartisan victory.

“We are heartened by the important investor protections added to the crowdfunding provision and will be vigilant in monitoring this and other elements to ensure the overall bill achieves its goal of helping entrepreneurs while maintaining protections for investors,” said Jay Carney, the White House Press Secretary, in urging Congress to quickly finish the bill.

Both Republicans and Democrats want to show voters they are working to improve the nation’s unemployment rate, with the GOP particularly characterizing the Jumpstart Our Business Start-ups, or JOBS Act, as legislation that would help smaller companies expand and create jobs.

“The bipartisan JOBS Act will cut through Washington red tape and help these small businesses and startups grow, expand and create jobs right away,” said the bill’s champion, Majority Leader Eric Cantor (R-Va.), who had dismissed as “phantom investor protection issues” the Senate’s efforts to change the bill to address concerns from AARP, federal regulators and others that weakening regulations could lead to fraud.

Passage in the Senate came after a tumultuous week that splintered Democrats, whose leaders were reluctant to halt a bill that had broad political support, including from powerful investment banking interests. Only 23 lawmakers had voted against the earlier version of the bill this month in the House.

The JOBS Act aims to help smaller businesses attract investment capital by loosening federal regulations, some stemming from the Sarbanes-Oxley Act of 2002, that supporters of the bill say can be onerous and costly.

One provision in the legislation would make it easier for businesses launch initial public offerings by phasing financial reporting requirements with the Securities and Exchange Commission over five years or until the company achieves more than $1 billion in annual revenues. The SEC chief said this exemption was too broad, and would allow even large firms to bypass federal regulation.

“We will rue the day we rammed this through the House and Senate,” said Sen. Richard Durbin of Illinois, the No. 2 Democrat, who broke with party leadership in voting against the bill.

Senators did, however, find bipartisan support attach an amendment that would require crowd-funding websites, which can pool up to $1 million in investments by selling stock online, to use register with the SEC.

The change would also require disclosure by investment promoters as a way to prevent anonymous “pump-and-dump” operations, and it would cap the annual amount individuals can invest.

That amendment was a bipartisan effort from Sen. Jeff Merkley (D-Ore.), Michael Bennet (D-Colo.) of Colorado and Sen. Scott Brown (R-Ma.), is expected to remain when the House considers the bill next week.

But even Merkley voted against the final product, calling it a “paved highway to predatory scams.”

March 2, 2012

By Lisa Mascaro, L.A. Times

See original online story here. 

 

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