“Even as some segments of the economy bounce back, the lagging pace of improvement in the real-estate market continues to hamper owners’ efforts at landing credit. “As the big guys are doing better, people ask, why not the smaller firms? Well, this is a huge part of the reason,” says William Dennis, Jr., a senior research fellow at the National Federation of Independent Business in Washington.

Because business owners used real estate to support financing endeavors in a variety of ways, the subprime crisis hit Main Street particularly hard as it rippled through the credit markets. Before the real-estate bubble burst, home and business properties were a reliable source of collateral for many businesses.”

Franchisors, who rely on and had relied upon easily available credit in the recent past for franchisees to expand, are going to have to reconsider their growth plans for the forseeable future as collateral values aren’t going up anytime soon. That is why it is critical for franchise systems to use this opportunity to sharpen their swords. Improving internal systems, methods and support to really help existing franchises achieve greater profit and stability is more important than ever. Franchise flywheel represents the type of tools ZOR’s should be adopting to put an emphasis on improving core capabilities until the damper on growth passes.

While Darrell was right about credit restricting growth, he missed a few important points – many of which he is likely aware of and might agree with.

It is highly unlikely franchisors are going to convince the banking community to change their ways anytime soon. Educating bankers about the “industry” isn’t the answer in the near term. In fact “educating bankers” might result in LESS lending to franchisees. Why ? The fact is that default rates on franchise loans are TERRIBLE, approaching 1 in 5 deals with some systems experiencing over 50% defaults. This fact reflects that many franchisors have not managed their systems in a manner that lends to REAL success. In many instances, franchise business models are unsustainable.

Instead of hoping for a miracle, like lowered underwriting standards, franchisors should focus on 4 fundamental things:

1. Improve REAL profitability and the balance sheet by cutting overhead;

2. Enhance the franchise business model and UNIT ECONOMICS;

3. Start identifying and recruiting QUALITY prospects to develop; and

4. Weed out poor franchisees who are draining the system’s resources.

The answer to the growth challenge is not easier lending standards. Hardly. It is the need for most franchisors to run their business better by doing some fundamental things. The industry for too long kept emphasizing unit growth as a measure of success and in the short term it isn’t. That is why quality and AFFORDABLE tools like Franchise Flywheel are quite relevant to achieving the fundamentals. You can’t really accomplish the 4 items above, getting back to basics, without the tools and a philosophy that really get you there.

The next time a consultant advises you that educating lenders is the answer to your core growth problems, think again.