Funny Money

Getting A Loan

More money than ever is available for franchise financing, and it's coming from an unprecedented number of sources, ranging from community banks and nonbank lenders to tailored franchise finance companies and brokers. At the individual level, however, seeking money to buy and operate a franchise can be a long and frustrating experience. Some franchisors facilitate the process by helping start-ups with business plans, loan applications, alliances with lenders or even direct loans. Most do not. Newer and smaller franchise systems, in particular, lack the resources to provide such assistance. Nevertheless, whichever franchise you select, "before beginning a search for outside funding, ask what programs the franchisor has in place to help franchisees secure funding," recommends franchise veteran Rick Anderson. The general manager of franchising of Little Rock, Arkansas-based Franchise Finance says his company works "with a number of franchise systems that are preapproved. When a prospective franchisee comes to us for funding, we don't have to underwrite the franchise system, so the loan is processed that much faster. Many finance companies have similar relationships with franchisors."

In the absence of such relationships, search the Internet for franchise financing sites, banks, finance companies and equipment leasing firms. Many provide a wealth of information online; some even accept loan applications and spell out their qualifications. What does Anderson look for in a loan application? "We consider their credit report, net worth, liquidity and outside income," he says. Franchise Finance likes borrowers to have 30 percent of the purchase price in cash as well as some assets and backup income during the initial stages of their businesses.

Other lenders are similarly inclined. Consequently, when Teears solicited the Raleigh branch of BB&T Corp. for a franchise loan two years ago, he was denied. "They weren't impressed by my numbers," he reports. Teears was looking at The Cleaning Authority's $22,000 franchise fee plus twice that amount in start-up and operating costs. He had only $17,000 in cash and mutual funds, and was leaving his job to move to Raleigh. All signs pointed to a compatible and profitable union between Teears and The Cleaning Authority, based on testing, research and counsel provided by The Entrepreneur's Source, a franchise consulting organization. But the bank wasn't convinced, and neither were the many others he tried. Nine months of searching, waiting, calling and persisting produced nothing.

After some additional coaching from The Entrepreneur's Source, the frustrated Teears once again descended on BB&T, where he had developed a cordial relationship with a new lending officer. He went armed with documentation-including impressive financials from an existing The Cleaning Authority franchisee. It worked. "They granted a $60,000 loan with the first six months as a line of credit, so I only paid about 13 percent interest on funds drawn," recalls Teears. "I still have $20,000 of that, which I might use to expand my territory."

Need a helping hand getting your capital? Read Financing Your Franchise for a fountain of sources.

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This article was originally published in the January 2001 print edition of Entrepreneur with the headline: Funny Money.

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