From the September 1997 issue of Startups

One of the most important aspects of opening a franchise is usually the least enjoyable. Figuring out how to finance a franchise venture can cause many headaches and sleepless nights, and creates plenty of questions without simple answers.

Fortunately for today's potential franchisees, financing is much easier to find than it was just 20 years ago. Many of today's lenders understand the special needs of franchisees seeking financing, and many have targeted franchisees as a growing, desirable market.

Just ask franchisee Doc Cohen. When he sought financing for a Great American Cookie Co. franchise in 1978, lenders were anything but receptive.

"Cookies were a relatively new retail concept, and the bankers would laugh at me and say, `You want us to lend you money to sell cookies? Do you know how many cookies you need to sell to pay the rent?' "

Cohen is the one laughing now; he owns 28 Great American Cookie Co. franchises, from Colorado to Florida. "There's a lot of dough in cookies," he says. "All my stores are doing really well."

Cohen couldn't get traditional financing to open his first store, but he did manage to raise $35,000 from family members and personal savings accounts. By gathering more than half his start-up costs, he proved to an equipment leasing company he was serious about the venture, and they granted him a $30,000 equipment lease.

After six months, business was phenomenal for Cohen. With a proven track record, he was able to go to his local banker and get financing for his second store--and the 26 after that.

AT&T Capital Corp., an international provider of leasing and financing programs for a wide range of businesses, introduced a franchisee lending program in April called Franchise One.

"We look at franchisees as a separate market with a distinct set of needs," says Bob Neagle, senior vice president of marketing and business development at AT&T Capital Corp. in Morristown, New Jersey. "We find franchisees desirable as recipients of loans, because the franchise market continues to grow. And not only do franchisees need start-up assistance, they will continue to need assistance as they grow."

With an established franchise, franchisees have an easier time finding financing than independent business owners do, says Don DeBolt, president of the International Franchise Association (IFA) in Washington, DC. "A franchisee has a more bankable loan than the independent businessperson, because the franchise has a track record," he says. "Banks track all loans, and the default rates are lower with franchises than with independent businesses."

Funding for your franchise can come in a variety of forms, including help from the Small Business Administration (SBA), bank loans, a franchisor that offers financing or one that refers franchisees to lenders that understand their needs. Before you obtain any financing, however, you'll need to consider some of the questions every lender asks and the items they'll require.


Julie Bawden Davis profiled nine mobile businesses in the August issue of Business Start-Ups.

What Franchise Lenders Look For

"Most lenders will first consider the four C's of lending, which are capacity, collateral, credit and character," DeBolt says.

Capacity refers to whether or not you can repay the debt, which will mean examining your potential earnings and expenses.

Collateral is an insurance policy for the bank. It refers to any property you own that the bank may hold if you're unable to repay your loan.

Your credit history will give lenders an indication of whether or not you're likely to repay your debt. They'll check your credit report to see how much you owe, how often you borrow and whether or not you pay your bills on time.

Lenders look at your payment history, and they'll take lawsuits, bankruptcies and tax liens very seriously when considering your character. They'll also do a background check and evaluate your previous work experience. Experience in the franchise industry can work in your favor.

Lenders also scrutinize the management skills of franchisees, Neagle says. "We look for quality, professional people who'll make a significant commitment to the business and who have a good, sound business plan that has sustainability," he says. "We also look for lenders who'll be investing some of their own money, which shows they have faith in the business' success, and we look at the overall stability of the franchise itself."

Most lenders require you to show them a business plan that spells out your goals for the franchise's growth and profitability, and to explain how much money you'll need. You'll usually have to provide three years' worth of tax returns; a cover letter describing what you're looking for, including the loan amount and how you intend to repay it; a personal financial statement; and financial projections. The latter figures are estimates of how much you expect to earn and what you believe your expenses will be, which can be estimated by talking to other franchisees who have bought the same franchise in similar markets.

Putting the results of your research on paper is necessary, says Edina, Minnesota, franchisee Jim Gendreau, who has owned many franchises over the past 14 years, including, at one time, more than 50 Cost-Cutters Family Hair Care salons.

"You can't just give potential lenders an advertising brochure, say you called three or four franchisees and that you think you'll do well," he says. "It's important to sell your idea to your lender with facts and figures."

If you need help developing your business plan, there are several places you can turn.

"In many instances, existing franchisees will be happy to share their business plans with you," DeBolt says. Franchisors also offer some help; many will refer you to consultants they have on hand to answer questions. Consult with business experts, and contact other franchises for information such as typical store sales and cost of goods.

"Consult with a franchisor or an independent accountant to review your plan critically," Neagle urges. "Compare your projections against comparable store projections."

Or you could gather your own advisory board, as Gendreau did recently while working on his business plan for a new franchise. He asked five businesspeople for assistance: a business attorney, a CPA, a mergers and acquisitions expert, an advertising executive and a business writer. They've advised him on his business proposal, free of charge. Initially, Gendreau's relationship with these advisors was a kind of mentorship. Over time, he's made the relationships reciprocal, and now regularly returns the favors by providing his own expertise, also free of charge.

Once you've got your business plan in hand, it's time to choose the financing option that's best for you. Consider the following choices:

The Small Business Administration (SBA)

The SBA is one of the greatest sources of financing available to franchisees. SBA loans are typically made by a private bank or other lending institution, with a portion of the loan guaranteed by the SBA. The 7(a) Guaranteed Business Loan Program is popular among franchisees. Within this program, the government guarantees loans made to franchisees and other small-business owners who can't obtain financing on reasonable terms through other channels. Lenders approve and service the loans after the SBA has issued a guarantee.

The SBA also offers pre-qualification loans for women and minorities. Within these programs, the SBA prequalifies women and minorities before they approach lenders. Rather than collateral, the programs focus on each applicant's character, credit, experience and reliability.

"Say a woman has been an office manager for a franchise for several years, and her boss offers to sell her the business," says Vicki May, an economic development specialist at the Santa Ana, California, office of the SBA. "Although she has never owned a business before and doesn't have the standard collateral, she has worked on-site and knows how the business operates. If she also has good personal credit and reliability, as far as paying her bills in a timely manner, she would be considered for a loan."

Franchisors That Offer Financing

A few franchisors offer innovative financing programs for franchisees. Valvoline Instant Oil Change Franchising Inc., which runs more than 500 franchised and company-owned auto oil-change and fluid-maintenance shops, offers a variety of franchise financing options.

"We've found that financing is a big motivator," says Les Fry, a franchise sales representative for Valvoline, "because it gives our franchisees options, especially those franchisees who wish to grow and build more centers. Financing allows them to expand at the pace they want."

Valvoline's lease-financing program offers franchisees a 100-percent-financed leaseback program for land and building development, which can mean much lower upfront costs. "The average construction cost for a center is about $500,000, and most banks require at least 25 percent down, which would mean an investment of $125,000," Fry says. "The 100-percent financing eliminates that initial out-of-pocket expense."

Valvoline also offers a mortgage-based finance program for franchisees who wish to purchase rather than lease a station and land. This program is open to franchisees who've been operating a Valvoline center for at least 18 months, or who've been working in a similar quick-lube business as an independent operator for at least three years. It allows franchisees to get started with just 15 percent down, by offering loans that cover up to 85 percent of the cost of development of the center. Valvoline also offers lease programs for signs, computers and lube equipment.

Memphis, Tennessee-based Service-Master, fran-chisor of the AmeriSpec home-inspection service, Furniture Med-ic, Merry Maids, ServiceMaster Residential/Commercial Cleaning Services and TruGreen-ChemLawn concepts, has offered franchisees financing for 10 years.

Through its own financing company, ServiceMaster Acceptance Co. (SMAC), it lends qualified franchisees up to 70 percent of the franchise fee and equipment package.

The program allows franchisees to retain more working capital, says Bob Burdge, director of market expansion for residential and commercial services at ServiceMaster. "Of those franchisees who finance, 95 percent or more get a loan through SMAC," he says.

Other franchisors offer equipment financing on a more limited basis. Mail Boxes Etc., a San Diego-based postal and office-supply store franchisor, for example, offers up to 100-percent financing for as much as $30,000 in equipment. This program was started to free up money so franchisees would have more working capital, says Patti Durham, spokesperson for Mail Boxes Etc.

Franchisor-Preferred Lenders

Many franchisors, while not directly involved in financing, have established preferred relationships with banks and other lenders. These institutions have financed loans for other franchisees in the same system, and their experience helps them process future loans to the franchisee's best advantage.

"Preferred lenders are up to speed with what a franchise requires," DeBolt says. "They know about the bankability of the loans and the specific needs of that particular franchise."

Dunkin' Donuts offers a program that provides franchisees financing through two national preferred lenders. The program is available in select markets and provides up to 75 percent of the projected costs to franchisees for developing their networks, including initial franchise fees, working capital, leasehold improvements, vehicles and equipment. Once franchisees complete an evaluation process, they're eligible to apply for financing from a preferred lender, who then makes an independent credit review. Because Dunkin' Donuts provides a limited guarantee to each of its sponsored lenders and covers a portion of each loan, it charges a program fee.

To find preferred lenders, it's best to call the franchise you're interested in and ask if they have one. You can also consult the franchise company's Uniform Franchise Offering Circular (UFOC), a comprehensive disclosure document about a franchised company, for information.

If a franchisor doesn't have a preferred lender, potential franchisees can often find a willing lender by approaching banks that have loaned money to other franchisees in the system. Chances are, the lender will be receptive. To find such franchisees, consult the UFOC.

Franchise Financing Specialists

Some lending institutions, including banks and finance companies, specialize in franchise financing or have specific departments that do so.

One such lender is Franchise Mortgage Acceptance Co. (FMAC), which has loaned $1.3 billion to franchisees since it started in March 1991. It expects to loan $700 million to $800 million in loans this year. "We are a preferred lender to many franchises," says FMAC founder and president, Buz Knyal. "We loan money to more than 100 separate franchise concepts and have more than 130 employees on staff."

Both FMAC and AT&T Capital Corp. screen franchisees by closely evaluating them for the four C's of credit mentioned earlier.

"We look at a franchisee's character and credit history," Knyal says, "as well as the financial strength of the franchisor."

The likelihood of finding financing for your franchise today is better than ever. Most lenders realize that loaning to franchisees can be a worthy investment. Take advantage of this opportunity in the marketplace when looking for funds for your new business.

Franchise Guidance

Entrepreneur Magazine's Franchise Special is a valuable guide that includes everything from start-up costs and franchise fees to company growth, current trends and contact information, with listings of more than 1,400 franchises and business opportunities. Published by Entrepreneur Media Inc., the guide also provides information on legal issues, available financing and what to do before buying a franchise or business opportunity. Look for it on newsstands starting September 2, 1997.

Contact Sources

AT&T Capital Corp., 44 Whippany Rd., Morristown, NJ 07962, (201) 397-4073

Cost-Cutters Family Hair Care, 7385 Bush Lake Rd., Edina, MN 55439, (612) 941-7773

International Franchise Association, 1350 New York Ave. N.W., #900, Washington, DC 20005, (202) 628-8000

Mail Boxes Etc., 6060 Cornerstone Ct. W., San Diego, CA 92121, (619) 455-8800

ServiceMaster, 860 Ridge Lake Blvd., Memphis, TN 38120, (800) 230-2360

Small Business Administration, 200 W. Santa Ana Blvd., #700, Santa Ana, CA 92701, (714) 550-7420

Valvoline Instant Oil Change Franchising Inc., 3499 Dabney Dr., Lexington, KY 40509, (800) 622-6846