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3 Sources of Franchise Financing

Know how to make sense of the current economy and its impact on franchise funding.
November 3, 2008
URL: http://www.entrepreneur.com/article/198310

Everyone knows the current lending environment is a challenge--especially if you're trying to finance a startup. Yes, there's still financing available for qualified people, but selecting the right funding strategy is more important than ever. It's time to get creative when thinking about financing options.

Despite what you hear on the news, money is available. There are institutions and individuals who haven't been affected by the housing market and still have money to lend. It's important to note, however, that we're seeing some big changes from traditional lending procedures in the franchise industry.

The first change is that it's more important than ever to start sourcing financing options before even choosing the franchise you want to buy. While historically we've seen much of the franchise finance market driven by home-equity lines of credit, this type of financing is more difficult to obtain in the current financial climate. Therefore, it's never too early to look into financing alternatives.

Another change is that your credit score is far more important now than it was even a few months ago. In today's climate, getting financing will be difficult with any credit score below about 700.

Also, once you've decided on your franchise and are approved for a loan, act on it quickly. Lenders aren't going to leave credit commitments outstanding for 30 days or more the way they used to; they want you to act in five to 10 days. If you don't take it, they'll cancel their offer and lend the money to someone else.

In the past, people relied on time-tested approaches for franchise loans; but in today's economy, you may need to get more creative. Here are three alternative funding sources to consider:

Franchise Funding Specialists
How do you know which finance options might be best (or even available) for you? Companies such as FranFund or Guidant, which live in this market every day, can explain potential strategies you can use in your financing efforts.

These companies typically have established relationships with various lenders that specialize in one or more types of franchise financing. They may also offer equipment-leasing options, signature credit lines, 401(k) rollover products, SBA lending, conventional lending, etc. Finally, they can tell you how much credit is realistically going to be available to you.

After gathering your financial information, the franchise funding specialists will formulate a lending strategy with you. Once you make the final decision to proceed, they will package your information and follow the process from beginning to end. Their knowledge and relationships in the industry are critical in expediting the transaction, and these companies typically don't charge a fee for their services until or unless you actually receive your financing. So the upfront risk to you is limited to a small amount of your time.

Cash is King
We've heard it before. Well, this is never truer than in uncertain economic times. Many executives have been or are going to be displaced in this market shakeup, and they often receive a significant amount of cash to help them transition out of their old jobs.

This cash can come in the form of severance pay (lump sum or otherwise). It can also come as benefit continuations, retirement account settlements or rollovers. Ask yourself how you're going to "invest" this cash in an effort to re-create your lost income or, better yet, build some additional wealth for your family.

Consider investing it in yourself by building a franchise that can support you. Many people, after considering this idea, come to the conclusion that they can produce at least as high a return using this strategy as they would in the stock market. They will also have far more control during the process.

Thank You For Your Service
For our country's veterans, the government has established a program called the Patriot Express Pilot Loan Initiative. This is an SBA-guaranteed loan program for military veterans, those currently in the military who are close to retirement (Check the SBA website for eligibility requirements) or their spouses. The SBA will guarantee up to 85 percent of the loan. That means the lender only is at risk for 15 percent, which makes such loans more attractive to the lender. Best of all, the credit score requirements for Patriot Express loans are significantly lower than what we otherwise see in the current market, so it's easier to qualify for these loans.

Honorably discharged military personnel should also look into the VetFran program, which the International Franchise Association started as a way to help veterans. To date, more than 300 companies have joined the program, which offers substantial discounts on fees and expenses as a way to show appreciation for honorable service to our country.

Because there are many ways to finance a new franchise, be prepared to do some careful research on the subject to find the option that will work best for you. Though the financing market has gotten more difficult in this tight credit cycle, there are always loan dollars available for the right person and the right opportunity.

Remember to ask everyone you think might be helpful in your search (including the franchise company you are interested in) for any advice and options that might be available to you. Start early, and continue to refine your efforts as you get closer to deciding on a franchise. Good luck.