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.
18 Perfect Businesses for The Modern Day Man
The Krystal Klear Water franchise specializes in providing clean, mineral-rich drinking water to their customers through specialized water filtration systems. Franchisees provide water contamination testing, preventive maintenance, and in-home, naturally purified water. The health and fitness nut will love this franchise because Krystal Klear's water systems have less pollutants than the competition. The systems are also low maintenance and do not add salt to the water like other water softening systems. This residential water filtration supplier targets an annual market size of approximately $2.6 billion, with sales growth projected to grow at rates of 6-8% per year. Sounds like the same amount some gym rats spend at GNC each month.
Know Before you Go – Non-Compete Provisions in Franchise Agreements
In general, non-compete provisions state that the franchisee will not, during the term of the franchise agreement and for a reasonable period thereafter (typically two or three years), own or be involved in any “competitive business.” What constitutes a “competitive business” will vary from franchise system to franchise system, but most franchisees can generally expect to be prohibited from taking part in any business that offers goods/services that are either identical to or competitive with the goods/services offered under the franchise system. Non-compete provisions must be limited in geographic scope, and generally cover a set radius (usually somewhere around 5 to 25 miles) around the former franchised outlet, and possibly also the outlets of other existing franchisees.
My Franchise Agreement is About to Expire – Now What?
The answers to these questions will depend on the language of your specific franchise agreement, although some general principles can be identified: