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Raise Capital

Everything you need to know to finance your franchise
February 5, 2001
URL: http://www.entrepreneur.com/article/37336

Of all the mistakes new business owners make, the most fatal is failing to anticipate the cost of going into, and staying in, business. When you begin to explore franchising, you quickly discover that one of its benefits is having franchisors who can help you avoid this common error.

The rules that govern franchisors require them to provide you with a disclosure document outlining, in addition to other information, the details of your initial investment. With a history of new franchise openings and knowledge of how the business typically operates during its initial period, experienced franchisors can estimate not only the cost of establishing the business, but also the working capital you'll need.

Keep in mind, however, that the information contained in a disclosure document, while accurate for the franchise system, may not be accurate for your particular location. Much of a given system's information is based on historic averages. Your costs will differ somewhat depending on your market, your costs for real estate and labor, and a host of other variables. With the help of an experienced franchisor, local realtors and other professionals, you can identify these market variables and more accurately estimate your total investment. Gaining an accurate understanding of your capital needs is the starting point in your search for funding.

Before you began your franchise search, you should have already determined how much you need to invest. You should have looked not only at your bank accounts but at your liquid assets as well and determined what they're worth either as collateral for loans or as saleable items. You may have also had discussions with family and friends to see whether they wanted to invest in your new business. Now, knowing what you need, you can start the process of determining where the rest of your initial investment will come from.

Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid recently co-wroteFranchising for Dummies(IDG Books) with Wendy's founder Dave Thomas.

How The Franchisor Can Help

Start with the franchisor. They've been through the process with other franchisees before, and many have internal programs to assist franchisees. These might include:

If the franchisor is a manufacturer of the products you'll be selling, it might provide an initial fill of inventory or provide you with longer than standard terms to pay for your initial inventory.

Most established franchisors also have working relationships with lenders and other financing companies that are familiar with their business and are willing to provide funding for qualified individuals. Some franchisors provide the loans directly; others act as guarantors.

Not all these programs are offered by every franchisor, but they're worth asking about.

Going To Your Bank

At some point, you'll probably turn to your local banker. If you have a relationship with your bank, talk to people there first. If they can't help you directly, they're likely to know other banks in your community that can be of assistance. Look for banks experienced in lending to small businesses. And remember, bankers are competitive today and the Web is full of sites that can give you comparative information on banks and interest rates.

Before you meet with any banker, make certain that you come prepared with the information he or she needs to make a lending decision. Prepare a business plan on your future franchise. Include not only the information provided by the franchisor (brochures, disclosure documents, etc.) but also information about the business you want to establish (investment, competitive information, market information, projections) and about yourself. Ask your accountant for help preparing a proper business plan and presentation.

Another source of advice on developing business plans and getting started in business is SCORE. The Service Corps of Retired Executives is a nationwide nonprofit association with 11,500 volunteer members and 389 chapters throughout the United States and its territories. It's also a resource partner with the SBA. Besides providing business advice for free, the volunteers at SCOREhave years of experience in helping businesspeople and consequently do a terrific job handing out advice.

Whether you're speaking with your banker, your accountant or a SCORE representative, you're likely to hear a lot about SBA loans. The SBA loan program is not a direct source of money, but rather a source of loan guarantees to the lending institutions from which you'll be borrowing. Most lenders are familiar with the SBA loan programs and can help you complete the information the SBA requires. You can find information on the many programs the SBA offers at http://www.sba.gov.

A relatively new program established by the SBA is the Franchise Registry. The Web site lists approximately 150 franchise systems that have submitted their franchise documents to the SBA for review and approval. By pre-clearing their documents, the franchisor enables prospective franchisees to get expedited loan approval from the SBA.

Other sources for leasing programs and funding can be found through the International Franchise Association's Council of Franchise Suppliers.

The money you need to get into business is out there. Make certain you know how much money you really need, and be realistic. Remember, once you borrow money to start your business, you have another mouth to feed: the loan source. Principal and interest on the loan has to be repaid, and your franchise needs the cash flow to make those payments.

A Few Pieces Of Advice
  1. Forget the stories you've heard about the people who became millionaires by funding their businesses on their credit cards. When that really happens, the stories are so unusual that reporters have to write about it. Your chances are better in Las Vegas.
  2. Plan to have a cushion of debt-free funds available so you're prepared if your business doesn't take off as expected.
  3. Finally, make certain that your business doesn't risk your future or the future of your family. Don't use your kids' college fund. Don't gamble with your retirement funds. You may want to retire someday, no matter how great you find franchising to be.