Financing Options

Raising Capital

You have finally, after much thought decided on the franchise you want to buy. The next question is, ‘How are you going to pay for it?' It really is not like going to your local bank, unless you are backed by some darn good collateral, like your home, you still will have a hard time securing a loan, even from a local bank.

Also, most lending institutions want to see a solid business plan with at least a good 25 to 30 percent of the capital coming from you. This is called ‘good faith' in that it assures that you have a vested interest in your new business. Although it sounds odd, the more money you have invested in your business, the more money lending institutions will be willing to lend you, that and a strong personal and credit history will also be a big help. But what if you don't have all this going for you?

Well, the good news is that most franchisees generally will have an easier time securing loans because of the established franchises that have a history of selecting successful franchisees and a history of franchise success.

The Franchisor

The first thing you should find out about financing is from your franchisor. An established franchisor and especially if he is successful will be able to help you with financing. It could be in writing a business plan, getting a loan or perhaps providing their financing programs for you. It is also a good idea to ask existing franchisee where they were able to get financing.

The Franchisee

Make use of a Home Equity Loan. Many franchisees are able to raise capital by taking out a home-equity loan. You should reserve about 30 percent of your home's value as an insurance policy in the event you need to borrow more money later on. This is a good way to try and cover some or all of your expenses.
Many downsized or retired professionals have gone into the franchise business due to a dream of owning their own business. Severance or retirement accounts, such as the 401ks and such can be used without penalty to fund some or all of the franchise start-up costs. You will need to check first and see an accountant familiar with IRS rules to make sure you are going by the law.
Since banks are historically reluctant to offer long-term loans to small firms an easy way to borrow from a bank is to set up a line of credit; however this will require sufficient personal collateral, such as the equity in your home. The reason for this is if you default on your loan, the banks need a way to recoup their losses.
Consider a commercial finance company. Finance companies will advance funds based on a percentage of a businesses assets and cash is turned over to the finance company to pay down the loan when the receivables are paid. They do tend to charge higher fees and will require rigorous and concise reporting of key aspects of the business operation
U.S. Small Business Administration (SBA) Loans. The SBA is a guaranteed lending program encouraging banks and non-bank lenders to make long-term loans to small firms. They do this by reducing the risk and leveraging the funds available. The SBA does not make the loans, but guarantees up to 85% of a start-up franchise loan. Rates are competitive and terms are usually longer than other institutions.
There are the ones close to you that you may be able to ask to help financially by investing. Friends and family although this in itself is probably not a good idea, but if it is acceptable, make sure you have an attorney to draw up formal contracts and never take money from a friend or family who cannot afford to lose the entire sum. It is a gamble after all.
You may want to partner with one or more people to share in the financing and eventually share in the profits.

Consider the financing options carefully and what will be workable for you. Don't be satisfied with just finding a loan; any loan with a bank or go with the first bank that approves you application or charges ridiculous rates. Look until you find what you want and what you can afford.