The SBA, which for years gave franchisees little or no special assistance, has emerged as a key source of loans to those who lack sufficient capital and don't qualify for bank financing. In the past decade, it has aggressively promoted a guarantee program that insures banks against the risk of default. Although the SBA doesn't make loans directly, it works hand-in-hand with an SBA-certified commercial lender (get a list at www.sba.gov). Applicants go through the ordinary credit review process with the lender, who forwards the application to the SBA. Although SBA loans are easier to get, they're not automatic. You need to submit a business plan, put up collateral-30 percent of the value of the loan is typical-and, in many cases, personally guarantee the loan by pledging your house or other assets.
The SBA has sped up the process by creating the Franchise Registry. It streamlines the loan application process by providing a central database of information about participating franchisors that have been certified to meet SBA rules. That way, the applicant no longer needs to provide that information, an onerous chore for past franchisees.
The best source of financing information is the franchisor, which is familiar with options and lenders who have financed other franchisees and who understand the business concept. Most important, growth-hungry chains have the incentive to bend over backward to bring you into the family. General Nutrition Companies Inc. (GNC), The Lemon Tree and The ServiceMaster Co. go so far as to directly finance a portion of the franchise fee, equipment, initial setup costs or a combination of the above. Since equipment is such a big part of initial outlay for restaurants and other businesses, franchisors in those industries may have special programs to lease these items for much less per month than you would pay to buy them. Even if they don't, it's often more practical from a cash-flow perspective to lease rather than buy.
Give It Here!
Be prepared to ante up a lot of information. Lenders want hard evidence that you can pay the debt and that you have sufficient collateral in case you can't. They want to know how much other debt you have, how often you borrow, and whether you pay your bills promptly. You need to demonstrate you're a good manager and have a solid plan. Lenders also want to see a business plan that spells out your goals for the business's growth and profitability and how you'll put the money to work.
And paperwork? You'll need your business's three most recent fiscal year-end financial statements, including balance sheets, income statements, accountant's letters and footnotes. For a new facility, you must have a cost breakdown and a 12-month projected cash-flow statement. Be prepared to detail outstanding loans, including the initial balance, current balance, monthly payment, original term, remaining term and collateral. You'll also need to deliver your personal financial statement and resume.
Getting a new business up and running is one of the most demanding yet satisfying things you'll ever do. Keep reminding yourself that even with all the hassles, you have it a lot easier than your franchising predecessors.
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Niles Howard is a New Caanan, Connecticut, journalist specializing in business and finance.