Finding The Money You Need – Franchise Financing

Finding The Money You Need – Franchise Financing

Finding the Money You Need – Franchise Financing & Other Small Business Loans

Funding My Business, Business LoansAfter everything you’ve read and all the stats you’ve studied, you found a franchise that you’d like to buy. However, have you found where you’ll get the financing? There is the inventory, the royalty fees and don’t forget the working capital?

Before you approach a lender, first determine your net worth using a personal balance sheet that lists your assets and liabilities. Your assets should include all your holdings, cash on hand, bank accounts, real estate at current market value, automobiles owned and owe on, bonds, securities, insurance cash values and any other assets.

Then list your liabilities which will include current bills, any charges, your mortgage, outstanding auto loans, outstanding finance loans, etc. Then subtract the total of your liabilities from the total of your assets. Next get your credit rating. Lenders will be looking at income, stability and track record.

The longer you have been on the job and lived in your current place is a key factor that most lenders look at. They like to see what kind of track record you have in completing obligations. Next to stability, they want to see that you live within your means. Meaning, you aren’t spending more than you’re bringing in. What this tells them is that if you can handle your personal finances just fine, you’ll do good handling business finances.

Next, lenders will pull credit reports to see how your credit history looks. This is why it is important that you do this before you even start contacting lenders. The more you know what they’ll see, the better prepared you can be. If you see erroneous information, you have the opportunity to clear the matter up before a lender sees your credit history. If there are things on there that may look pad, such as a 90 day delinquency, you will need to have a good explanation for the lender.

Your Business Plan
Once you have your net worth determined and know your credit rating, you need to create a business plan. Take your time creating this because this can be a deciding factor whether or not you get your loan.

Your business plan should include an detailed and technical study of your proposed business. This should include accurate pro formas, cost analyses, estimates of working capital, projections and an indication of your “people skills” as well as a marketing plan. Certified statements of your net worth should be included as well as credit references.

Franchise Financing
It is common for franchisees to look to the franchisor for financing and most franchisors in the US provide debt financing. There are some that will carry the full loan while others carry a fraction of the loan through their own company. Most franchisors have simple guidelines and limits. There are several different ways a franchisor will structure a loan for a franchisee. Some franchisors offer loans with simple interest, no principal with a balloon payment due in 5 to 10 years. Few franchisors will set up loans with no payment due until the end of the first year.

Some will finance the whole start-up costs and others offer financing for only a part of the entire start up cost. There are some that will finance the equipment, franchise fee and / or operational costs. Some franchisors have an established relationship with leasing companies for the necessary equipment, which is often a large part of a franchise.

There are also non-bank, non-franchise companies that offer specialized equipment leasing to franchisees or asset-based lending for franchisees’ equipment, fixtures, furniture and signage. Many allow the franchisee to buy the equipment when the lease is up. There are tax advantages lost when you lease instead of purchasing the equipment.

Look here to start your funding:

There are two reasons that a business is franchised:

  1. Franchising For Expansion
  2. Raise Capital

With good credit and financial requirements met, most franchisors will work to get a franchisee on board, and that help goes a long way in getting financed. There are many other sources of financing and franchise in addition to the franchisor or instead of the franchisor.

Once you know the extent of what the franchisor will finance, create a list of other available sources to work on for the needed capital. The standard sequence of contacts is:

  • Friends
  • Relatives
  • Home Mortgages
  • Veterans’ Loan
  • Bank Loans
  • SBA Loans
  • Finance Companies

Usually banks won’t work with just your financial profile unless you are willing and able to qualify for a SBA loan guarantee. This will only put the bank at as little as 10% risk because the government may back up your loan by as much as 90 percent.

You start by submitting a loan application to for initial review with the lender and once they have deemed it acceptable they send it to the SBA along with your credit information. After approval by the SBA, the lender will fund and close the loan. The borrower makes their payments to the lender.

There are also financial brokers for the larger deals who will put together pools of money along with SBA funds and private funds and make the funds available through the franchisors, much like a trust fund. Smaller banks will group together funds for investing and contribute to these types of trusts as well.

A home-equity line of creditis another option that some franchisees will choose, or a second mortgage on their home. This type of financing is risky as you can lose your home if the business fails. Assets like bonds, mutual funds and stocks are often used to secure a loan too. There are rules using these in regards to their being connected to an IRA profit-sharing plan and rules about over age 59.

Consider These Tips
There are unlimited sources of financing to help finance a franchise. However, you never want to attempt to operate a franchise without any reserves. You should ever invest over 75 percent of your own personal cash reserves.

Keep in mind that the franchise price is not a reflection of actually owning and operating a business. Other cost that need to be accounted for are down payments for the building, equipment, fixtures and signage as well as inventory and leasehold improvements. You should also factor in administrative expenses, employee training, promotional costs and possible sales commissions.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>