Where to Find Financing for Your Franchise
In challenging economic times, it can be very difficult for small businesses to obtain sufficient financing to cover their start-up costs and operating expenses. Franchises account for a good portion of all small business start-ups, and many individuals looking for franchise financing to complement their personal investment have found it a difficult task. Fortunately, there are resources out there for entrepreneurs who are seeking non-personal financing for their franchise business, though it can take significant time and effort to secure such funds.
If you decide that you do want to obtain financing for your franchise business from external sources, you should:
- Identify the amount of financing you want to obtain.
- Make sure you have a good credit rating.
- Be sure you have a business plan, including a projected pro forma franchise income statement and cash flow projection (see this guide to franchise accounting).
- Ask the franchisor if they offer financing, leasing or can recommend 3rd party financing sources. Some franchisors are willing to finance a portion of the initial franchise fee.
- Try to obtain feedback regarding sources of capital from current franchisees with whom you speak during your franchise due diligence process (recall you can find a list of franchisees in the franchise disclosure document).
Possible Sources of Funding
The Franchise Registry
A large number of franchisors are listed on the SBA Franchise Registry. Franchisors listed on the Franchise Registry can have loan applications from their franchise candidates processed more quickly by the SBA and its lending banks since the SBA has pre-approved their franchise agreement.
Friends and Family
A reliable source of financing for small business owners and franchisees has come from family and friends. If there is an opportunity to obtain some working capital from a friend or family member, it can be easier to arrange than funding from an institution, although there are obvious personal matters you'll want to ensure you are comfortable taking on prior to seeking this kind of capital.
Home Equity
Once a leading source of funding for prospective franchisees, home equity loans have become less of a factor during the recession and housing downturn. However, if you have a good amount of equity in your home, this could still be a good source of funding.
Retirement funds
A number of firms specialize in arranging funding from individual retirement accounts for franchise prospects. Be sure that your accountant or personal financial adviser provides guidance, if you are considering this franchise financing option.
Franchisor Financing
Certain franchisors offer some form of financing, either directly or by providing a reduced franchise fee or by financing the franchise fee. A franchisor may also offer a special incentive program whereby a franchisee can earn a rebate off royalties if certain sales goals are reached.
Bank Financing
Banks, which have long been the primary source of franchise and small business loans, have become tough lenders. In most cases, only the very best clients, with the lowest amount of risk, can obtain financing from both large and community banks.
Veterans
The International Franchise Association (IFA) VetFran program includes more than 300 franchisors that offer discounts and incentives to veterans on franchise fees and other start-up expenses.
Minority Lending Programs
There are various programs available for women and other minorities who are seeking funding for a new business. Although the majority of these programs are not targeted specifically to franchisees, there are some programs available for would-be franchise owners. The International Franchise Association provides information regarding funding for minorities.
Local Funding Programs
Some states and cities offer programs to entice new businesses to open in their market by providing tax credits or low-interest loans. Although participation in these programs can have stringent requirements, you may contact State or local economic development offices in your market to see if there are any programs relevant to you and whether you qualify.
Use these suggestions to determine if you can find the funding for your franchise opportunity or low cost franchise.
MinorityFran Changing the Game for Minorities in Franchising
As far as the incentives go, there are three main categories that franchisors tend to work with when they're looking to increase access to their systems for minorities. The most popular method used, by far, is to offer discounts on initial franchise fees. The second most popular incentive offered to minorities by franchisors is financing assistance and other discounts to help pay off the sizable franchising fees that new franchisees incur. Finally, in rare instances, franchisors offer minority franchisees administrative and development support above and beyond what they provide to the non-minority franchisees in the system. Here is a list of franchises that have gone the extra mile to reach out to minorities looking to get involved in franchising.
Franchise Disclosure Document for Dummies – Part 4
One key aspect of Item 12 is establishing how franchisees’ territories will be defined. This may be by zip code, population, population with certain demographics, or geographic or political markers (i.e. streets or county lines). For franchises with population-based territories, a franchisee in a busy downtown urban area may have a territory of only a few blocks, while a rural franchisee’s territory could reach for miles.
5 Tips for Finding the Right Franchise
So you’ve decided that a franchise is the right path for you? Now comes the exciting part—choosing among hundreds of franchise opportunities. Here are questions to ask yourself to help narrow the field:
