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.
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.
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.
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.
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.
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.
Getting Out: Important Points for Selling a Franchise
In either case, the franchisee’s right to sell the franchise will be governed by the transfer provisions in their franchise agreement.
Advice From Franchisees Who Have Been There
Many of the franchisees we talked with had to make a decision first on whether they would open an independent business or a franchised one. A few of their stories follow.
How Listening Shapes Franchise Recruiting
During a recent conversation with a well respected franchisee recruiter, we discussed the qualities of an excellent listener. We came up with four different levels of listening. This franchisee recruiter explained that as he moved up in listening levels, he increased his results exponentially.