What the Fed’s Interest Rate Hike Means for Franchising

This week the Fed raised rates for the first time since 2006. BoeFly, the franchise lending platform, has received a number of questions from franchisors and franchisees alike, asking what it all means for them and their businesses. Here are a few key points to consider:

The economy is healthy and that’s good news for growth. The fact that the Fed has maintained rates so low, for so long, was a clear indication that the economy needed support. Beyond rock bottom rates, the Fed adopted groundbreaking programs like “Quantitative Easing,” designed to keep the economy from sliding back into recession. If the economy is a patient, our trusted doctor, Fed Chair Janet Yellen, has canceled the next round of antibiotics. She hasn’t suggested, however, that the patient is healthy enough to run a marathon; in other words, expect moderate growth, with conservative rate movements to follow.

Franchisees: Your customers are feeling a bit more confident, so maybe it’s time to reduce dependence on discounting.

Franchisors: A healthy economy will mean more competition to source franchise leads; consider bumping up your lead generation budget.

Variable rate loans (i.e. most SBA loans) will rise. The SBA has been a critical capital source for franchisees, particularly those who were financing their first unit. Most of these loans are variable rate, resetting quarterly based upon the Prime Rate. With this rate hike, borrowers with a variable rate loan will be paying an additional quarter percent in interest expense.

Franchisees: Your borrowing cost will increase, except for any fixed rate debt. But chin up, even with the rate increase, your interest rate remains at historic lows.

Franchisors: Many future franchisees expect their ultimate franchisor to support them in securing financing, and as rates rise, franchisees will become more sensitive on this point. Ask yourself how the support you deliver to new franchisees stacks up against your competitors.

It is a compelling time to expand. We believe that you shouldn’t run out and make a large purchase solely because rates are low and are rising. For consumers, this means you buy a home because it’s the right decision across a number of factors, like how your new monthly mortgage payment will compare to your current rent, whether the location is convenient to your work, and whether it has good schools for your kids. You shouldn’t buy a home simply because rates are low. But, low rates that are expected to rise is certainly a factor to take into consideration.

Franchisees: A good economy, good access to capital at historically low prices and the right unit economics all provide compelling reasons, especially when considered together, to add that additional unit.

Franchisors: Review your existing franchisees that have a contractual development agreement. It may be the time to press those franchisees to deliver on their obligation. If the franchisee can’t meet their commitment, you may need to exercise your corresponding rights.

Whether you are franchisor or franchisee, or thinking about becoming a franchisee, tracking borrowing costs is important as you consider your business plan.