Franchise Financing

Congratulations for investigating the world of franchising!

A franchise is a very predictable and safe way to enjoy the benefits of being an entrepreneur. Financing a franchise purchase is oftentimes a topic that people do not address early enough in the process. Although there are many great business and franchise opportunities available, how you finance your franchise venture often determines the level of success you will enjoy. Is your personal credit good? Do you have management or strong work experience? Can you invest 25% as a down payment toward the total cost of the business? Then, you should be able to receive funding toward a franchise investment. Traditionally, there have been four ways that people finance a business: Loans through the SBA –The SBA doesn’t lend money!

This is a common misconception that many people have. They simply work with banks to get your loan. Your chances of obtaining a loan oftentimes improve when working with the SBA; however, it will likely be more expensive (and time consuming) to obtain this method of financing for your franchise. A Bank Loan – Tell a bank that you want a loan to start a new business…you won't get any money unless you can prove you don’t need the loan because you can completely collateralize the business with assets such as cash, stocks and home equity. 

The real estate market has enjoyed a nice run in the past decade and many people, perhaps you, have home equity you could use to purchase a franchise. If you choose this route – don’t tell your banker you need the HELOC to buy a franchise. This could potentially delay the process for you as it can raise many more questions! Utilizing the Entrepreneur Pension™ – see below! There is one method for financing a franchise that you may not be aware of. Guidant is the nation’s leading Retirement Account Facilitator and specializes in helping clients implement unique funding solutions for their franchise purchases. We can help you access your retirement funds to purchase a business without being subject to taxes or penalties! Redirect your retirement funds to a more productive investment.

No withdrawal or distribution here – simply invest your IRA or 401(k) into your new franchise! Avoid business debt! By using your retirement plan you can avoid getting a loan, stripping equity from your home and/or draining your available cash. Invest in yourself. The stock market has proven time and time again that no one will care about your money and/or investments more than you. Return excess profits to your retirement plan! Not only can we show you how to invest your retirement account(s) into your new franchise – we can show you how to return additional profits to your plan! Receive a favorable Letter of Determination from the IRS!

  • Q: I've found the franchise I want, but I don't have enough cash to completely fund the startup of the business, so I'm going to need to get a loan. I'm just starting to talk to banks, and they seem to want a number of things I don't have, such as a complete business plan with projections for the business. They also expect me to personally guarantee the loan even though the business is a corporation. Is my best option to use the SBA in order to avoid these hassles, or what should I do?

  • A: This is the number-one topic for questions we receive. The best source of information about your financing options is the franchisor. They should be able to tell you, from experience, how likely it is for you to obtain financing from any particular source. It may also be helpful to understand the principles that underlie your ability to get financing, regardless of the lending source. There are "Cs" involved in any decision to loan money to someone: Cash, Credit, Collateral and Character. The fact is that it doesn't matter whether you go to a bank, use the SBA guarantee service or go to a friend or relative for the loan.

The same basic rules apply to any successful attempt to get credit. Here's how the four Cs work:

  • Cash. One of the most common misconceptions people have is that they can borrow all the money they need to open a business. Unless your personal net worth is far larger than what you need to borrow, this is almost certainly not true. For SBA loans, you'll most likely have to come up with funds—either from your own assets or other sources—probably equal to at least 25 to 30 percent of the total investment needed to start the business, before the SBA will consider lending to you. Lenders like to make sure you personally have "skin in the game."

  • Credit. Another thing lenders insist on is a strong credit history. This means they want to see a track record of you borrowing money and making your payments on time. Though your home mortgage might be the best example of a large loan you have serviced well, you'll find you get almost no credit for that type of loan. Everyone realizes most people will take care of their mortgage before their other bills, so what they really want to see is a pattern involving timely payments on other types of loans. While a good credit history doesn't mean you'll get a loan, a bad one almost guarantees that you won't.

  • Collateral. Most lenders require you to completely secure any loan you want with personal assets sufficient to provide for 100 percent recovery if you default on the loan. In many cases, franchisors can recommend lenders with whom they have had a good experience. This may include someone other than a direct lender -- since these firms are often able to select the best source of financing from a pool of aggressive lenders. These firms are very familiar with Small Business Administration guaranteed loans. It doesn't matter one bit whether your business is a corporation or any other type of entity, or whether you go through the SBA process—they are going to look to you for collateral.

  • Character. The final condition you must meet relates to your character or reputation. Frankly, this is like your credit history—having great character won't ensure you'll receive a loan, but having a bad reputation will almost guarantee that you on't. Having strong enough character and a great reputation used to be enough to offset a lack in some of the other Cs, but those days went out the window with the S&L crisis 15 years ago, at least as far as any regulated lender is concerned.

You also mentioned a lender's request for a complete business plan. You should have a complete business plan before embarking on any new business startup for a host of other reasons besides just financing. If you don't have one, stop everything else and put it together.

The franchisor you're working with should have a lot of helpful information or even a template already developed for this purpose. Many franchisors have also set up programs with selected financial sources to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process with a minimum of hassle for you. The first thing you should do, once you're fairly certain you've found the franchise you want to buy, is to request this information from the franchisor and start looking into your options. Good luck on finding your loan and for the success of your new business Basics - Franchise Financing Programs (SBA & VA) There are several franchise finance assistance programs offered by the US Government. Both are in the form of loan guarantees made to lenders.

Programs are offered by the: USA - Small Business Administration (SBA) Franchise Registry. In 1998 a central registry of franchise systems eligible for SBA loan guarantees was established. Since registry franchisors have been preapproved, the processing time for a franchisee being approved for a loan is shortened. To use this program a franchisee requesting SBA financial assistance needs to provide a one page certification from the franchisor stating that the prospective franchisee's contract is the same as the form approved by the registry originally. USA - Department of Veterans Affairs (VA) VetFran. The Veterans Financial Franchise Initiative (VetFran) was initiated in the early 1990s as a way for franchisors to thank members of the military for their service during the Gulf War. VetFran allows service members to pay only 10 % or less of the total initial investment cost of purchasing a franchise.

That difference between the required franchise fee and what the franchisee has available to invest is contributed by the participating franchisor as part of an "initial earned equity". Many International Franchise Association (IFA) members participate in the program. The franchisee must be able to qualify for a SBA 85% loan guarantee package. At the present time VetFran is limited to franchises with initial investments which are $ 150,000 or less.

The Small Business Administration (SBA) Registry lists names of franchise companies pre-registed and reviewed to shorten the process for SBA loan applications. Loan applications for registered franchisors can be reviewed and processed quickly and efficiently.

Listing on this Registry means that the franchise agreement does not impose unacceptable control provisions on a franchisee (which could result in affiliation with a franchisor). The lender and/or SBA must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, creditworthiness, conflicts of interest, character, use of proceeds, and dissemination.

We can provide you with a list of franchises onthe SBA Registry. To be eligible for an SBA loan, the borrower must meet these criteria:

  • A strong business plan - Like banks and other financial institutions, the SBA requires the submission of a business plan to see that the entrepreneur possesses a clear understanding of the business they're in, have taken steps to research the market, and studied the prospects of the business. The SBA wants to see detailed plans on how the business can make money and repay the loan.

  • A good personal credit rating - Credit history serves as a person's gauge for credit worthiness. The borrower's track record in paying their bills will is an important component in the loan application process. The SBA partner banks, which provide the money, conduct a credit examination of the borrower then submits the results to the SBA.

  • The borrower must have a stake in the business - The SBA wants to see those applying for credit to have a personal investment in their business. In the SBA's view, business owners who have put their own money into the venture are much more likely to push hard for the success of their business. The SBA will require that the borrower contribute at least 25% of the total investment from his or her personal liquid assets.

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He is the author of "Zero to $100 Million in Five Years", has a B.S. in Marketing and an MBA.  He has served on the Franchisor Forum Board with the International Franchise Association.  In 2004, he was named the "Entrepreneur of the Year" by Ernst and Young.

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