Financing a Franchise in a Down Economy
It’s no secret that the current economy has affected the franchise world for good and for bad. On the “good” side of the spectrum, people who have been content working for others are re-evaluating their professional options. If you own your own business, you have greater control of your future and are able to reap your own rewards instead of passing them to your boss.
On the other side of the spectrum, you have the negative effects. This can be summed up in one word: funding. Across the board, getting loans and funding for anything from a home to a car to a business is harder than it has been for decades. However, that certainly doesn't mean you should throw in the towel. If you’ve found a franchise opportunity that’s the right fit for you, there are still ways to get the funding you need. Here are some things to remember as you start the process:
1. Choose the right franchise.
When it comes to funding, there are two very important things to look for in a franchise:
- SBA Approval: Focus on those franchises that are SBA approved. SBA approval increases the franchise’s legitimacy in lenders’ eyes and, generally speaking, makes it easier to find funding.
- Franchisor Financing: Look for franchise concepts where the franchisor is willing to do seller financing on the franchise fee. This is becoming more common in today’s market, and it will help decrease the amount of capital you need upfront.
2. Be prepared.
Getting funding is not a casual matter. This means you have to get your act together before you start applying for loans. Too often people try to get funding before clearly identifying their financial needs, so it’s important to develop a strategy that includes several financing options.
Have a business plan in place, but also a finance plan. Where are you going to seek financing? Do you know how much you’ll need? What are your pro forma projections? A good franchise system will help you answer these questions. Knowing this information will save you time and increase the likelihood that you will get funding for your franchise investment.
Talk to other people who have raised money and ask them how they got it. What hoops did they have to jump through to get it? This may help you avoid major pitfalls and may also help you create the connections that can make all the difference.
3. Break it down.
One thing to remember when buying a franchise is that the investment can be broken down into several categories. Rather than trying to fund the entire investment from a single source, you may want to consider funding the various parts of the investment individually. Your investment is typically broken down into categories such as franchise fees, real estate, equipment, and other startup costs. Here are some examples and breakdowns of how to go about securing funding:
- Franchise fee. You should be able to negotiate seller financing with the franchisor, especially in this down economy. Franchisors are trying to sell more franchises and they’re probably willing to cut you a deal.
- Equipment. Because this is usually a hard asset, this is something that is easy to get a loan against because it can be collateralized. You should try to get a lease agreement with the bank to finance this over three or four years.
- Real estate. With the slowdown in the real estate economy, now is the time to go to the owner of the building and ask for tenant improvements and whether they can finance this portion of your startup costs.
4. Choose the right lenders
Once you’ve found the right franchise, prepared a well-thought out business plan and broken down your costs, it’s time to find the money. There are many different types of loans and leaders you can appeal to.
- Friends and family loans. It’s not unusual for a parent, grandparent, friend, or neighbor to be willing to help you raise your needed collateral by investing in you. In fact, with the economy and job market on the ropes, some parents are buying franchises for their college graduate children to run. This provides their child a job with real business experience, while also receiving a better return on their investment than the current market could render. Be forewarned that although friends and family loans can be easier to get than traditional loans, they can be the most costly (in many different ways) if the business takes a bad turn. Protect yourself and your investors by putting everything in writing, just as you would with any loan.
- Local banks and credit unions. There is a lot of research highlighting ways the credit crunch has hurt big banks, but in most cases, local and regional banks haven’t been hit as hard. Local financial institutions are also more likely to have a vested interest in helping local customers opening local businesses. Credit unions can also be a good source of financing. Make a professional presentation (see Be prepared) and be ready to personally guarantee the loan.
- State programs. A recent report by the IFA Educational Foundation determined that for every $1 million of lending obtained by franchised businesses, 34 jobs are created and $3.6 million in annual total economic output is generated. These are the types of numbers state and local leaders like to hear. Some states have special programs that help small-business owners receive funding if they invest back into the community (say, by creating jobs). Talk to your local economic development department and see what options are available to you.
- Severance package. You might be looking at buying a franchise because you are out of work due to a layoff. If you have a severance package, consider using it to fund a franchise purchase. It might be the best investment you ever make.
The Franchise Foundry is a Springville, Utah-based strategic investment and development partner that helps franchise concepts in all aspects of franchising including funding, marketing and sales, and legal compliance. Their client portfolio includes SpoonMe, Fairway Divorce Solutions, and Five Star Painting. Visit the Franchise Foundry online at www.franchisefoundry.com.
