The number of franchises dropped as the recession (learn more) made many people were wary about starting a business and because thousands of franchises closed, among them auto dealerships and real estate brokerages. High-end restaurant franchises were also hit hard — the restaurants in the Steak & Ale chain were among the franchises that shut down.
"Where it's really having its hardest effect is the aspiring entrepreneur who doesn't have that track record or that relationship with the banks," says Stephen Caldeira, president of the International Franchise Association.
But banks are also wary about franchises they're unfamiliar with — the problem that Kimsey ran into. That's a huge change from before the recession.
Are Franchises a Sound Bet?
"Prior to 2008, there was the general view of franchisees and the lending community that franchising was a fairly sound bet," says Darrell Johnson, CEO of FRANData, a research firm. "The rising economic tide would float all boats, and one brand might not be as strong as another, but everyone was going to do OK."
Now lenders are asking more questions about the brand, Johnson says. That's happening even in some of the franchise industries that are most popular now, including health care, elderly care and gyms and other fitness companies.
"The credit score that used to guarantee a loan doesn't anymore," says Peter Ross, CEO of Senior Helpers, which has 300 franchises that provide in-home care to the elderly. As a result, "people have to be a lot more creative" to raise money to buy a franchise. He sees more buyers tapping their 401(k) accounts. (More: Postponing Retirement Indefinitely.)
Most of the successful buyers tend to be those who already own franchises and have a credit history to show the banks. Private equity firms that have their own money and don't need to go through a bank are also buying.
More Hoops for First-Timers
First-timers can find themselves jumping through an increasing number of hoops.
When Scott Gow decided to open a UPS Store franchise in the Denver area, he applied to a bank recommended by United Parcel Service Inc., but the bank kept raising the amount of his own money it wanted him to put up. Gow says he's not sure why the bank kept demanding more from him.
"I got to a certain point where I wasn't comfortable," he says. "I could have financed the business myself."
That is what he ended up doing, not only out of frustration, but because he was laid off from his job with a government contractor and knew that there was no way he would qualify for a loan at that point. He uses his 401(k) to cover the costs of renovating, furnishing and stocking the store.
Banks Make More Demands
Other UPS franchise buyers have had a similar experience with banks, says Chris Adkins, the company's vice president of sales. "I don't see a tremendous amount of rejections" by banks, he says. But the loan application process is so painful, with banks making more and more demands that some buyers decide to finance the purchase on their own.
Gow did get a break from UPS because he had been in the Air Force for 24 years before leaving in 2001. The package delivery company waived the nearly $30,000 franchise fee under a program called Operation Enduring Opportunity that was launched in 2011 that helps veterans open franchises. Gow hopes to have the store open next month.
Some would-be franchisees are turning to relatives for help. Christian Brantley and Jessica Mitchell were able to finance the $15,000 franchise fee and construction costs themselves when they bought a Snap Fitness gym near Willis, Texas, about 40 miles from Houston. But they were turned down for $170,000 in financing to lease about 75 treadmills, stationary bikes and other equipment from the manufacturer. The reason: They were too young. When they applied, Brantley was 23 and Mitchell, 24.
"We have no equipment," Brantley recalls thinking. "We are going to have a yoga studio for a year."
The solution was for Mitchell's father, a real estate developer, to be their guarantor on an application with another equipment maker. They got their machines for the same amount, $170,000. The gym opened in March, three months later than expected.
Without help from Mitchell's father, Brantley says, he'd be "freaking out."
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