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Sonja Michael, a corrections officer at the Willard-Cybulski Correctional Institution in Enfield, Conn., dreamed of turning in her badge. "I love to cruise, and I thought, what better way to make a living than by dealing with happy people going on vacation instead of with inmates who are just the opposite," she says.

Ms. Michael chose to buy into CruiseOne, a franchiser in Fort Lauderdale, Fla., that charges a low franchise fee of $9,800 and lets its 420 franchisees work out of their homes. But finding the money to get started "drove me crazy," says Ms. Michael, who faced house and car payments and credit-card debt. Ms. Michael approached Beneficial, a subsidiary of Household International Inc., Prospect Heights, Ill., which specializes in high-risk loans. "Beneficial loaned me $8,000 and made me use some of it to pay down my credit cards. Sure, the interest payments are high, but this proves that money to buy a franchise is available to everyone, even people like me," says Ms. Michael.

Just a few years ago, most people had to refinance their homes or borrow against their credit cards to buy that first franchise, notes Mary Tomzack, president of consulting firm FranchiseHelp.com in Elmsford, N.Y., and author of Tips & Traps When Buying a Franchise (Source Book Publications, 1999). These days, start-up franchisees often can get financing help from their franchisers, lenders that specialize in franchise loans and equipment leases, and even the federal government.

S.B.A.-Guaranteed Loans

When Doug Bryant of Gallipolis, Ohio, hit age 48, he accepted a $41,000 severance package from his employer, a major utility company, and decided to put it all into his passion: golf. "I wanted to spend the rest of my life doing something I love," he says. But he found himself a fairway short of the $200,000 or so needed to buy a golf-equipment franchise from GolfUSA of Oklahoma City, Okla.

"I walked into the local branch of People's Bank, where I'd done my personal banking for years, dropped off my business plan and filled in a two-page application for a Small Business Administration-guaranteed loan. In less than a week, I was approved to borrow $150,000," Mr. Bryant says. "The interest rate has even dropped a couple of points since then." In March, Mr. Bryant opened a GolfUSA store in Ashland, Ky. His own good credit history and the franchise reputation made it "a cinch to get financing," he says during a phone interview cut short by a rush of customers.

Customers were banging on the windows of Mary Perschbacher's Children's Orchard store in Fenton, Mo., before it even opened. Like Mr. Bryant, Mrs. Perschbacher and her husband Earl were amazed at how quickly they were approved for a $90,000 S.B.A.-guaranteed loan to open their children's clothing resale franchise. "It was harder finding a location for our store than obtaining the financing," Mrs. Perschbacher says.

Since 1953, the S.B.A. has provided government-backed guarantees for loans made by regular lending institutions, an aid to business start-ups and inexperienced applicants such as first-time franchisees. Loan terms vary from five to 25 years and carry an interest rate that floats at about two points over prime. From 1990 to 2000, the S.B.A. guaranteed 25,859 loans to franchisees, more than half of them for sums less than $150,000.

Until recently, an S.B.A. loan-review officer would have to pore through each borrower's documents to determine whether the venture met SBA standards, a lengthy process that wasn't always consistent from office to office. Now, that information is often online. Frandata, a firm based in Washington, D.C., has an arrangement with the S.B.A. to streamline the process. For a fee, Frandata will determine whether a franchise company's policies and documents make it S.B.A. eligible, eliminating the need for duplicate examinations. So far, about 200 franchises have passed the screening process and are posted at the Franchise Registry.

Lender Relationships

One of those is Line-X Franchise Development Corp. of Santa Ana, Calif., whose 300-plus franchisees spray polyurethane linings onto the beds of pick-up trucks. "Being on the registry is a great credibility-builder," says Line-X general manager Scott Jewett.

But like many franchisers, Mr.Jewett also provides new franchisees with another edge, a ready-made relationship with a lender. Buyers of Line-X franchises, mostly blue-collar workers, usually can afford the $20,000 franchise fee but often need help financing the $50,000 equipment and chemical start-up. So lending company Crocker Capital buys the equipment and leases it over a five-year period. A number of leasing companies will allow franchisees to finance up to 100% of their initial costs.

About 65% of all new Sign*A*Rama franchisees use equipment leasing to get started, says Tim Phillips, that company's financial services manager in West Palm Beach, Fla. Franchisees John and Barbara Mincy, for example, are paying $1,500 a month to lease three computers, two printers, a scanner, and other equipment to make vinyl signs for customers of their Bloomington, Ill., store. Jersey Mike's sub shop franchise company, based in Wall, N.J., refers franchise purchasers to Arrow Capital in Chicago, where 95% of all loans are made to franchised restaurant concepts. Similarly, CIT, the financial services division of Tyco International, provides start-up financing loans of $100,000 to $300,000 from its Small Business Lending office in Livingston, N.J. Baby's Room, Elmhurst, Ill., will provide some "Jump Start" funding to franchisees who are close to making a down payment.

Explore all those alternatives, recommends Ms. Tomzack, before considering a conservative home equity loan of, say, $25,000 to $50,000, or borrowing on a credit card. Tapping personal assets too heavily may leave a budding business owner with nothing left for other costs, or even for personal living expenses.

New Line-X franchisee Brandon Borene of Santa Clara, Calif., says, "You can't just open a franchise and sit and wait for the phone to ring." When putting together his financing, Mr. Borene borrowed an extra $25,000 for an extensive advertising campaign. He delivered brochures to area truck dealerships and designed a booth for events, such as gun shows, where pick-up owners gather. The tactic worked, and Mr. Borene expects to turn a profit after being open for just three months.

From StartupJournal.com
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