How Swipe Fees Impact Franchise Lending

Franchisees Impacted By Swipe Fees
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At Tuesday’s recent New England Franchise Association meeting, Steve Caldeira, President & CEO of the International Franchise Association, ran through a list of the major issues facing the franchise industry. “Credit access is the number one issue of the IFA”, Caldeira commented while reviewing the list. But, one item in particular caught my eye: Swipe Fee Reform.

In any other economic climate, Swipe Fee Reform would probably be the number one issue, commented Caldeira. For some small businesses, swipe fees are their largest business expense, outside of taxes & payroll.  In 2009, swipe fees from debit cards totaled $16.9 billion, according to the Fed Reserve. That is liquidity that small businesses lose, and the cost is passed along to the consumer. It also plays a major role in the ability for business owners to obtain working capital loans.*

Outside of traditional lines of credit, many franchise owners are leveraging short-term working capital loans, which tend to be based on cash-flow & payment behavior, as opposed to credit scores. The debt service on these loans typically comes from a percentage of business from card swipes, with payments automatically occurring on a daily basis. These short-term loans provide a great alternative to franchisees looking to find capital for inventory, marketing, and general expenses.

With the new regulation capping the debit card fees at 12 cents (credit card fees are unaffected), franchisees will suddenly be able to hold on to more of their capital, which in turn makes them better able to pay off the loans they need for growth in 2011.But, this bill is not without controversy, as there are now several bills in the legislature that are attempting to delay the new swipe fee regulation from going into effect.

What are your thoughts?

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photo courtesy of Bay News 9

*Working capital not available in the following states: AK, DE, ND, VT