What FRANdata Thinks

Outlook for Franchise Lending – Loans Increasing But Pace of Approvals Slow

April 7th, 2022 by Ritwik Donde

At the latest Multi-Unit Franchising Conference, Darrell Johnson addressed the current state of franchise financing. Based on FRANdata analysis. Franchising is growing. The recovery after the pandemic has proven the resiliency of the franchise model and, in turn, increased lender trust in the franchising model.   According to the latest from FRANdata CEO Darrell Johnson, demand is returning – Bank loans to businesses are on the upswing as competition intensifies to replace the government-backed debt that lenders accrued during the depths of the COVID-19 pandemic. A net 21.7% of bank loan officers reported higher demand for commercial and industrial loans during the fourth quarter, up from a net 7.6% who said the same three months prior, according to a recent Federal Reserve survey. The results represent a bounce-back from the low point of the pandemic in late 2020, when 35.3% of loan officers reported that demand was falling. During fourth-quarter earnings calls, bank CEOs repeatedly offered brighter — if still somewhat cautious — forecasts for overall loan growth this year, mainly due to rebounding demand for business loans.

The economic picture might be improving overall, but retail, hospitality, travel, and transportation businesses are still dealing with the impact of shutdowns caused by COVID-19. 2020 may be in the rearview mirror, but supply chain disruptions, semi-conductor shortages, manufacturing delays and labor scarcities — lingering effects of the pandemic, continue to leave some companies on uneven footing. Turnaround and M&A leaders are predicting the second quarter of 2022, maybe when the business community will experience a spate of corporate defaults, and asset-based lenders and other secured lenders will need to be ready to handle turnaround deals. Many struggling businesses were able to ride out much of the pandemic with the help of PPP loans. There is some worry that some companies will soon find themselves once again dealing with liquidity issues without that safety net continuing.

According to the Biz2Credit Small Business Lending Index, loan approvals continued to rise slower than pre-pandemic levels. Activity with big banks grew to 14.7% from 14.5% in January 2022. Similarly, there were small gains with small banks and institutional lenders. On the other hand, demand for business loans is picking up as the economy comes out of the pressures of the pandemic, driven by more consumer spending, and as companies are looking to bulk up their inventories. According to the Small Business Lending survey, over one in four lenders indicate the loan demand was moderately strong in Q4 2021 over the previous quarter. Overall, the small business commercial & industrial (C&I) loan balances decreased by 18.6 percent compared with the third quarter of 2020. The decline coincided with a continuing decrease in the percentage of loans guaranteed by the Small Business Administration (SBA) related to the ongoing forgiveness of Paycheck Protection Program (PPP) loans to small businesses. New small business lending increased by nearly 10 percent compared with the third quarter of 2020, driven by a 40.9 percent increase in new lines of credit.

Low business lending approval rates at small banks decreased from 91 percent in the second quarter to 71 percent in the third quarter of 2021, the lowest level reported since the survey’s inception. Approval rates for midsized banks decreased from 90 percent to 85 percent during the same period, while approval rates at large banks increased from 47 percent to 50 percent. The three most cited reasons for denying a loan for all bank sizes were borrower financials, credit history and collateral. About 11 percent of respondents reported a change in credit standards in the third quarter of 2021, up about 2 percent from the second quarter.

What does this mean to franchisors and their franchisees? 

Lenders are more watchful of possible challenges ahead that could affect borrower demand in the coming year, including higher interest rates, inflation, labor shortages, supply chain issues and rising fuel prices. In its September 2021 meeting, the Fed held benchmark interest rates near zero. However, it also indicated that rate hikes could be coming sooner than expected, with the first-rate hike likely to occur this year versus 2023.

Lenders are faced with unknowns that they are grappling with. Franchisors need to address these unknowns proactively. The lending environment is changing, and it is a franchisor’s job to keep up to date with lender needs. Lender-savvy Franchisors give lenders vital information while understanding what their FUND score says about their brand and how their performance transparency affects lender underwriting. 

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