The current economy is characterized by an interesting mix of optimism and anxiety. Franchises are a significant segment of the economy and despite a challenging economy, growth is expected to continue. For example, the International Franchise Association forecasted that franchises in the U.S. would grow by 3.0% in 2023, adding 254,000 jobs, reaching a total of 8.7 million employees. But while growth among franchisors is expected to continue, rising interest rates are impacting their growth and expansion outlook according to a confidence survey just released in Franchise Times by financial technology company Boefly, that helps franchisors qualify their applicants and connects candidates with lending options.
Franchises show unique characteristics in response to economic fluctuations and tend to exhibit counter-cyclical behavior, often performing better during challenging times. Even so, the current economy defies easy categorization, making it essential to analyze how franchises are faring and what trends are emerging.
For many aspiring entrepreneurs, even if secure in their current job, becoming a franchisee is a viable, accessible option for those that want the freedom of running a business with the support of a proven model. But it’s essential to understand how the economy plays a part in pursuing different franchise opportunities.
“Some thinking of opening a new franchise are tempered by the cost of capital right now but opportunities are there while existing franchisees are also expanding their footprint,” said Mike Rozman, CEO and co-founder of BoeFly,. “And as a whole, they have performed well, especially in quick-service restaurants (QSRs)”. Other franchises like those in automotive repairs, or even renting tires or offering windshield tinting are doing well as consumers spend more maintaining their cars in a tight economy. That doesn’t mean Rozman says that consumers aren’t willing to splurge on specialty cookie franchises to treat themselves too.
There are over 3,000 franchise brands out there, with one thousand of those being more capital intensive depending on what you are looking for. With franchise opportunities growing across various industries, it’s crucial to recognize the number of economic factors playing a role in the overall success – those include:
Current State of Capital Access: Following recent events in the banking industry there have been some intriguing dynamics shaping the capital access realm, with some traditional lenders pulling back due to a tightening market. In turn, similar to other businesses, this creates a challenging environment for potential franchisees seeking financing. “The Small Business Administration (SBA) however, remains open for business,” said Rozman. “It has even recently implemented rule changes that are expected to enhance capital access for new franchisees.”
Importance of SBA and Alternative Lenders: The SBA’s role in facilitating capital access for small businesses, including franchises, is crucial. With the recent rule changes, the SBA is expected to become even more supportive in providing financing opportunities. Nevertheless, the significance of considering alternative lending options is imperative. Rozman says, “While SBA loans offer transparent and fairly competitive rates, working with specialty finance lenders can often provide more tailored and flexible financing options.”
Choosing the Right Lender: Establishing a relationship with a chosen lender will improve access to competitive financing. For franchisees without existing relationships, seeking assistance from a provider like BoeFly, can deliver an extensive network of lenders. By leveraging their expertise and connections, these providers can match franchisees with the most suitable lenders based on their financial position, credit profile, franchise type, and financing needs.
Support from Franchisors: For any aspiring franchise owner, it’s important to note that franchisors play a vital role in the success of their franchisee. The best franchisors offer comprehensive support, providing detailed playbooks, assistance with location search, and a proven plan for marketing at the launch and beyond. Franchisees operating under the guidance of supportive franchisors tend to be more financially successful and gain better access to capital.
Understanding Franchise Success Rates: Prospective franchisees often wonder about the success rates of specific franchises. Information on this can be found in the Franchise Disclosure Document (FDD), which franchise candidates should thoroughly review. The FDD provides valuable insights into franchise continuity rates which lenders review to assess the viability of a franchise system before extending financing.
Capital access remains a critical aspect of starting a franchise business. While conventional lenders may be pulling back, opportunities exist through SBA loans and alternative financing options. Partnering with a reputable provider can ensure access to a diverse range of lenders and competitive financing terms. Additionally, prospective franchisees should seek support from franchisors with proven track records in assisting their franchisees. By understanding the dynamics of capital access and making informed decisions, aspiring entrepreneurs can turn their franchise dreams into a thriving reality in this evolving economic landscape.
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