Q: I'm considering buying a franchise. I've heard it may be easier to obtain financing for a franchise than an independent business. Is that true? If so, why?
A: A banker is primarily concerned with three things when looking at a loan request: management skills, repayment ability and the value of liquified assets in the event of default. A franchisor can ease these concerns by providing upfront and ongoing training, assuring the banker that someone with a vested interest will properly prepare the borrower. Bankers also look at successful franchise chains as proven entities with solid repayment abilities.
Another plus for the lender is the value of the franchise's assets, which are typically greater than the assets of a traditional business, mainly due to franchise name recognition. It's also easier to liquidate a well-recognized national franchise than, say, a Doug's Pig and Pit, because the franchisor sometimes offers a repurchase or remarketing agreement in the event of default.
Sound like the answer to your prayers? In reality, buying a franchise, regardless of the financing advantages, isn't for everyone. If you don't follow instructions well, which I don't, and you work best without any supervision, which I do, a franchise may not be for you. As intoxicating as loan approval may sound, don't forget that you do end up paying, usually in the form of an upfront fee as well as a percentage of your profits.
Still, I've made many franchise loans to many successful franchisees who wouldn't have any other kind of business. The bottom line? Know yourself well enough to know what form of business best suits your personality, or, to quote a rainmaker from the literary field, "To thine own self be true."
Who can answer the business-financing questions that keep you
up at night? Starting this month, consultant, ex-banker and
co-founder of Rainmaker Capital Corp. Doug Hood can.
Rainmaker Capital Corp. co-founder Marilea S. Hood also contributed. Send questions or personal anecdotes via e-mail to email@example.com.