Franchise Financing
One of the most misunderstood topics in franchising is financing. It is also one of the most important. Let’s say you don’t have all the money needed to start a franchise operation and want to get financing for the balance. Your first choice for financing – a bank – may not be your best. You need to gather information and develop a good working knowledge of the likely parameters of financing that apply to you and also the best sources of information about program options for you to pursue.
Bank Financing
Most people think that getting a loan to start a business is just a matter of talking to a bank. After all, isn’t that what banks do – loan money to people who need it? They figure they’ll explain their reasons for wanting this particular business, outline the projections for how much money the business will make and then the banker will loan the money based on this projection. The loan will be secured and paid back from all the assets and profits of the new business.
There is zero chance that this scenario will work.
If you walk into any bank and tell them that you want a loan to start a new business, you won’t get any money unless you can completely collateralize the loan through your own personal assets. In other words, if you have cash, stocks, home equity and other semi-liquid assets that could easily repay the loan if the business defaults, they’ll probably give you the money (but if this is true, you don’t really need a business loan).
If you have sufficient personal collateral to secure a loan for the amount you need, especially if it is in your home equity, the easiest and cheapest way to get the loan is to set up a line of credit at the bank for the amount you need. Don’t even discuss a business startup at all with the banker. Whenever a banker hears that you’re going to start a new business, it raises multiple red flags and creates issues that will just slow you down and cost you more money.
The Small Business Administration
Let’s assume you are not financially strong enough to take this approach. You’re going to need help. The other options potentially available to you include government-sponsored programs like the SBA, non-banking loan sources and lease options. These each have many variations but the common denominator is that they will be willing to take more risk so you’re chances of getting money will be better. The dollars you get from these sources will also be more expensive (in terms of fees or interest rates) to offset the increased risk.
Two common misconceptions about the SBA are that it loans money and that it is willing to do so on an unsecured basis. Neither of these assumptions is correct. The SBA has programs where it will work with lending sources like banks to guarantee the repayment of most of a business loan. This is done because the bank will not loan the money without the guarantee. The SBA charges fees to the borrower to offset the risk of making such guarantees. The SBA also has stringent requirements in relation to security that must be met before it will agree to issue the guarantee. This may still be your best option but keep in mind that it’s not automatic.
As a general rule of thumb, you’ll need to have your own cash available for at least 30% of the total investment required for the franchise business. You can also expect that any lending source will probably require personal guarantees that effectively will pledge all your assets to protect any loan.
Franchisor Financing Programs
The best source of information about the options that might be available to you is the franchisor you are interested in joining. They should be familiar with the costs associated with each option and the likelihood of you obtaining financing from any particular source. Many franchisors have already set up programs with selected financial sources to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process with a minimum of hassle for you. The first thing you should do, once you’re fairly certain that you’ve found the franchise you want to get, is to request this information from the franchisor and start looking into your options.
FranChoice helps future entrepreneurs realize the dream of owning their own business. FranChoice will help you find that perfect fit; matching up your interests, talents, and investment level with a strong franchise business. We provide this valuable service for free. Pre-screened, high quality franchise companies pay us a fee for referring qualified, prospective candidates.
From the beginning, FranChoice has been committed to its Mission Statement: “Helping People Realize Their Dreams.” By developing a unique and thorough system of candidate qualification, consultant training and franchise selection, FranChoice has helped thousands of entrepreneurs find a great franchise.
