The drought over - now we’re starving

Thanks to the downturn and job insecurity, at last the drought of good potential franchisees that franchisors have been complaining about in recent years is over. At Franchise New Zealand, we are getting almost double the number of requests for the magazine that we were just a few months ago. Unfortunately, the conditions that have brought us a glut of franchisees has simultaneously reduced the credit available to finance new businesses. Franchisors are reporting that the biggest barrier to renewed growth is  the ability of franchisees to borrow the necessary funds.

It’s a similar situation in the US, where incentives such as reduced royalties or waived franchise fees have become common as franchise sales have fallen amid the recession and the collapse in the credit markets. But, according to a report in Franchise Times, a growing number of systems are taking an even more radical step by guaranteeing and servicing the loans or even lending the money outright. The report suggests that there are numerous ways franchisors can offer internal financing. They can provide limited guarantees, full guarantees, loan servicing, remarketing agreements, mezzanine financing or joint ventures. Franchisors can raise money themselves and set up a separate fund, or they can simply use their own available cash. And with more of the franchisor’s own money at stake, they are tending to be rather more careful about the type of franchisees they appoint.

In the next issue of Franchise New Zealand magazine we’ll look at the funding situation locally and ask what alternatives make sense for franchisors here. If you have any comments or suggestions, let us know.