Covid’s 2022 Staying Power Underlines Franchisees Need for In-House Financing

Financing Automation & AI

For business owners everywhere, Covid-19 isn’t the only thing going on in early 2022, but — with the new surge of an especially contagious variant — it remains one of the biggest things. Two years in, the public-health crisis is still taking lives, straining hospitals, and weighing on an already uncertain economy.

During this crisis, franchisors are in a strong position to bolster the entities they rely on for distribution and street-level marketing. By offering franchise finance to their franchisees, they become financial-solution hubs, to the benefit of the Main Street entrepreneurs they count on to thrive as well as themselves. But striking out in this direction calls for prudent due diligence to find lending-platform providers with the requisite understanding of franchising and its unique characteristics.

In late December 2021, Moody’s Analytics lowered its Q1 2022 US gross domestic product forecast from 5.2% to 2.2%, mainly because of fulfillment delays and component shortages linked to the delta and omicron varieties of the coronavirus.

Still, the US Chamber of Commerce extols one business segment for particular praise: franchises. “Success stories during Covid-19 have not been limited to clever small businesses or large corporations, with many franchise-style businesses also figuring out how to keep customers coming back for more,” the association writes. One business publication claims franchises are “the businesses driving America’s economic recovery” from the coronavirus pandemic.

A time-tested business model gets a new lease on life with cutting-edge financing technology

Franchising goes back to medieval Europe, when proto-entrepreneurs would, for a price, secure Crown or Church licenses to hunt game, operate ferries, and collect taxes. But the concept didn’t really gel until American innovators saw its potential as a distribution engine in the middle of the 1800s. 

By now, spurred by the success of franchising pioneers like Singer Sewing Machine and Coca-Cola, the list of US franchising giants reads like a Who’s Who of consumer  businesses, including:

  • 7-Eleven 
  • Ace Hardware 
  • McDonald’s (and most other fast-food brands you can name) 
  • Re/Max
  • Rexall 

And while fast-service restaurants are the most visible examples of franchising, they only represent a quarter of franchises operating today, with the remainder spread across smaller, and often local, sectors such as fitness instruction, childcare, and home-improvement services.

In fact, past fast-food establishments, convenience stores, and real-estate agencies the most “franchised” industries are:

  • Beauty salons 
  • Fitness centers 
  • Full-service restaurants 
  • Hotels and motels
  • Janitorial services
  • Real estate agencies
  • Snack and “soft” beverage sellers 

Generally, franchises succeed more often than independent startups. After two years, 70% of independent startups are still in business, according to the US Small Business Administration and the Census Bureau. After five years, however, the survival rate for independent startups drops to 50%. By the 10-year mark, only 30% of businesses are still operating. In contrast, 95% of franchises were still in business after five years, and 91% after seven years, according to the International Franchise Association. 

Franchisees can benefit from in-house workarounds for seasonality and daunting equipment costs 

Even before Covid, some franchisors had decades of experience with “seasonality,” where some businesses — for instance, ski resorts — make their money in one (roughly predictable) busy period in the year.  

The tax-preparation industry falls squarely into this category as well, typically reporting a loss in Q3, the quarter right after tax season. And while tax-prep giant H&R Block is accustomed to earnings coming in at once, and long accustomed to helping its franchises bridge financing gaps in slow periods — it reached out to one lending-technology provider for help in automating and digitizing its financing program for franchise operators. 

With the pandemic as a spur, “H&R Block came to us for help implementing lending strategies designed to help it increase satisfaction among its franchisees and develop a funding strategy for franchise expansion,” says Elena Ionenko, co-founder and operations chief for TurnKey Lender, which provides financing technology and support in more than 50 markets worldwide. 

Other franchisors may be less concerned about seasonality than equipping franchisees to handle start-up and periodic capital-equipment costs. 

“In choosing our Unified Lending Management platform to help the company meet its franchisees’ cash-flow needs, H&R Block gets a seamless, white-label solution that’s fast, accurate, easy to use and features flexible reporting and analytics for sharing information,” says Ionenko. “Big Picture, H&R Block’s engagement with us reflects Gartner’s view that the surest way tto soften the impact of Covid-19 and ensure operational continuity is by accelerating digital initiatives.” 

Among franchisors that conform to this mold is Ace Hardware, which “provides internal-inventory financing to help existing franchisees open new stores without having to go back to the bank for financing,” according to Entrepreneur magazine. Meanwhile, pizza-chain startup Marco’s Pizza provides financing to franchisees with a credit facility underwritten by a private-equity fund. 

Franchisors unearth new efficiencies while reaching out to help Covid-slowed affiliates 

Ionenko expects in-house franchise financing to become an operational staple for franchisors that are eager to see their licensed affiliates thrive. “We hear from franchisors constantly,” she says. “They know their franchisees face a lot of uncertainty these days, and that having robust in-house financing sends a calming message to them: ‘We are in your corner, and we will back your play.’” 

But we’re not talking about something that costs more than it earns. “It’s true that franchisees rest easier knowing that HQ has an ongoing and vested interest in their success,” says TurnKey Lender’s Ionenko. “But a franchisor can make money lending to franchisees — while tapping into valuable financing analytics that new shed light on efficiencies and bolster marketing initiatives.” 

TurnKey Lender was already a leader in embedded-financing technology before Covid-19 struck in early 2020. Seven years ago, the company initiated a new kind of lending through its Unified Lending Management platform, which equips companies of all sizes to provide fast, secure financing to their customers and affiliates using technology that’s bolstered by sophisticated machine learning, but as easy to use and reliable as the ATM in your bank’s lobby. TurnKey Lender’s solution includes core functionalities such as digital-loan origination, alternative-credit scoring, AI-based underwriting, loan servicing, debt collection, reporting, compliance,  and more.  

“Since we started in 2014, we’ve been providing software-as-a-service that automates all digital lending operations, and all digital-lending decisions for every stage of every loan’s life cycle,” says Ionenko. “And from the start franchisors, have been on this journey with us, with more in our pipeline as we work together for better public health and renewed economic stability.” 

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