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Challenging times call for innovative thinking and problem solving.  I was interested to read in a section of the Wall Street Journal that Dominos Pizza is considering making loans available to its franchisees. This will allow franchisees to gain access to capital and not suffer from the limiting affects of the credit crunch in the US economy.   “Domino’s Pizza Inc. discussed how its borrowing capacity has been hampered by Lehman Brothers Holdings Inc.’s bankruptcy filing.  With the credit crunch weighing heavily on the restaurant industry, Domino’s said it will save its cash and potentially make loans directly to its franchisees.”

In fact Domino’s is the only franchisor so far committed to offering some of its own money to cash-strapped potential franchisees, though Burger King Corp., Tim Hortons Inc. and Sonic Corp. also appear open to the idea of stepping in to help franchisees, according to industry experts.

Franchisors can become well capitalised due to the nature of how capital flows though franchise networks.  It functions in the following way.  A franchisee will purchase his franchise business and in return gain access to the franchise owners know-how and use of protected trade marks.  It is by following this know-how or system that will help secure the franchisees business success.  In addition to the know-how the franchisee will also receive support and training from the franchisor.  For the services and benefits outlined above the franchisee will pay a management service charge (MSC) or royalty to the franchisor each month.  This system helps ensure a win-win relationship between the franchisor and his franchisees as both gain as incomes rise.

This model of payments and income helps protect the franchisor from the affects of economic downturn as he is receiving regular royalty payments from a number of franchisee businesses.  This can result in the franchisor being well capitalised and in some cases being able to lend to franchisees.  Not all franchise owners can or will lend to their franchisees.  Either way this story shows the innovative thinking being implemented by franchise executives on behalf their franchisees and the company’s shareholders.

“Franchisors that participate in direct financing are generally larger franchises with established histories of successful store openings,” according to FranFinancing.com. “Direct franchisor financing is most common in industries that require especially large amounts of capital and sometimes involve real estate, such as hotels or restaurants.