Are you looking for funding to buy a franchise? Do you need money to make improvements on your existing franchise? Yes, it’s a tough lending environment out there. And while getting funding ultimately depends on the lender, there are several things you can do to improve your chances of being approved for a loan.
Tips for the Potential Franchisee:
1. Create a compelling, complete package to present to your banker. “Any franchise finance package needs to tell a compelling story about the transaction,” says Ron Feldman, CEO of Siegel Financial Group, a company that specializes in placing financing for franchised and independent businesses. “This will include a comprehensive education on franchising, the brand, the reasons that the franchise unit is needed in the community, and, finally, why the applicant is the right person to operate the unit operationally, financially, and has the skills and resources to be successful. It is a sales document. Information is king; omission will cause a denial.” Sherri Seiber, COO of FranFund, a firm that specializes in franchise funding, agrees, saying, “Lenders are in a position to cherry-pick the deals they decide to move forward with, and the first cut is often just the aesthetics and completeness of the loan package.”
2. Write a business plan for your franchise. “The plan should detail your anticipated cash flow and expenses along with the marketing strategies for your business,” advises Len Fischer, CEO of BeneTrends, a firm that helps entrepreneurs fund startups with their retirement plans. “It is a good idea to speak with other franchisees and get their perspective on challenges during the first year they were in business.”
3. Get help from the franchisor. “Look in Item 10 of the franchisor FDD for any internal finance programs they may offer,” says Feldman.
4. Narrow down your search for lenders by asking fellow franchisees. “Ask other franchisees in the area during your validation calls who they bank with, as that lender would have experience with the brand,” says Feldman.
5. Pick a solid concept. “In addition to you, lenders are going to underwrite the franchise concept,” says David Nilssen, CEO and cofounder of Guidant Financial Group, a firm specializing in self-directed IRAs and small business financing. “Newer concepts or those with a poor track record could find it much harder to obtain traditional financing.”
6. Consider investing in yourself to mitigate the debt you need. “Many buyers are investing their retirement funds into a franchise without taking a taxable distribution or getting a loan,” says Nilssen. “They can also combine that with a loan which, if the down payment is larger, can improve the likelihood of it being approved.”
7. Be prepared to invest some of your own funds into the business. “The amount can vary from lender to lender and depend on the overall project but can run from 10 to 25 percent of the total financing package,” says Fischer. “Lenders want to see that you have taken some risk as well.”
8. Research and consider special loan programs like the IFA’s VetFran program available to military veterans, advises James M. Wilson, a business attorney who works with franchisees regularly.
Tips for the Existing Franchisee:
9. Don’t underreport profits. “Bankers need to see existing cash flow before extending additional credit to a business,” says Feldman. “Sheltering profits can cause cash flow to be underreported. Without cash flow, lenders cannot extend additional credit causing additional debt service. If you are ‘hiding’ cash flow, it causes a character concern to the lender.”
10. Beyond just profits, be fully transparent when it comes to anything regarding your business. “Don’t hide anything, and be ready to explain everything,” says Nilssen. “Lenders will walk away in a heartbeat if they feel you are not providing full disclosure.”
11. Take advantage of the new definition of “small business.” “As a result of the passage of the Small Business Jobs Act last year, small businesses are now defined by an ‘alternative size standard’ by the SBA,” says Feldman. “Many more businesses will now qualify for SBA loans, which carry a guarantee from the federal government. This will mitigate lender risk, and could cause lenders to say, ‘Yes!’”
12. Check out crowdfunding or peer-to-peer lending. “There are a quite a few crowdfunding websites, like Prosper.com, that allow business owners to borrow money from a group of investors,” says Duane Anderson, CEO of Anderson Franchise Group, a franchise sales and consultant company. “It’s not regulated like the banks are, but there is a strong chance your loans can get approved, especially if it’s for a business like a franchise which generally has a higher rate of success.”
Tips for Both:
13. Ask your franchisor if they have a finance toolkit to help franchisees approach lenders. According to Feldman, this toolkit could include a business plan template, a financial projection template, a bank credit report from FRANdata, and a list of active SBA lenders in your geographic area.
14. As a potential or existing franchisee, have a solid understanding of your financial needs and status by personally monitoring your credit. “There are companies out there such as CreditExpert and MyFico that will monitor your credit for next to nothing,” says Nilssen. “They’ll provide you with a copy of your report and alert you of any changes. You can also dispute inaccurate reporting right off the platform. Those things take a long time to correct, so stay [on top] of any issues.”
15. Make sure that your credit report is accurate and correct before going to a lender, says Fischer.
16. Show the lender that you’re credit-worthy. “Have a solid financial model built to clearly demonstrate your ability to service and satisfy the loan,” says Nilssen.
17. Have all the paperwork on hand and ready to present. “Lenders will also ask you to complete a personal financial statement which outlines your assets and liabilities, and will want to obtain copies of your tax returns for the last three years,” says Fischer.
18. Find a partner. “One direction that a franchise owner can look at is bringing on a partner when expansion being considered,” says Terry Mackin, managing director of Generational Equity, a merger, acquisition, and strategic growth advisory services firm. “Many entrepreneurs get into ownership to avoid partners, but there are quite a few individuals in the market right now who are not happy with the returns they are getting through traditional investments and might consider taking a silent [partner] role if you can show a strong management and growth track record.”
19. Consider relieving your cash needs by leasing the necessary equipment. “My advice is lease things that have a short useful life, like computers, because once the lease is up, the equipment will probably need to be replaced,” says Wilson. “Buy those things that will last for a long time.” If you’re new to the concept of leasing, check out www.EquipmentFinance101.org for a glossary of equipment finance terms, a lease vs. loan comparison and equipment financing benefits, among other information.
Sara Wilson is a freelance writer who specializes in issues related to small businesses. Contact her at email@example.com.