"There are more things in life to worry about than just
money--how to get hold of it, for example."
--Anonymous
Investing in a franchised business can take a lot of money. In
fact, the only really intimidating obstacle between you and your
dream of opening a successful franchise is financing. The very word
is enough to send prospective franchisees screaming into the night.
Don't panic--here are all the stops on the way to getting your
franchise financed.
Stop #1: Your Personal
Resources. Conduct an assessment of your own resources
before you launch into your franchise idea. First, prepare a
personal financial statement (on a generic form from your bank or
an office supply store or by using your personal accounting
software). You'll use it over and over again as you line up
your financing. Also, make copies of your tax returns for the past
two years--both the lender and a franchisor providing financing
will want to see them. If your Uncle Doug once offered to back you
in business, give him a call and take him to lunch. Be sure of what
you can count on--you can't afford to go into the business with
flimsy promises. Talk dollars and timing with good ol'
Doug.
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Stop #2: Your Accountant. If
you don't have an accountant, it's time to get one. Ask for
references from friends and family, and find an experienced one who
has handled small businesses (tip: Ask existing franchisees in your
area for references). Arrange a preliminary interview, discuss your
plans, and show the accountant your personal financial statement,
the investment estimates from Item 7 of the UFOC and any Item 19
earnings claim information in the UFOC. Talk about how you can
calculate a cash-flow picture of the business you're planning
and how much financing you need. Ask the accountant to recommend a
banker he or she has dealt with; usually accountants have great
leads for their clients.
Stop #3: The Franchisor. One
thing can be said for franchising as a method of expanding
business: It has developed a tried-and-true path for the individual
investor. Financing is an important part of that path. In about 30
percent of all systems, the franchisor itself will provide
financing directly or through a third-party lender. If this is
available from your franchisor, it's laid out fully in Item 10
of the UFOC. Even if the company does provide financing, it's
likely to be for only a portion of your total needs. Time for Stop
#4.
Stop #4: The Bank and Specialty
Franchise Lenders. It's fair to say every small
business needs a solid banking relationship. Even if you don't
find financing at your local bank, you'll need to build a
day-to-day service relationship. The place to start is the bank
where you do your personal banking. Talk to a banker about your
plans and explore their programs.
Also contact independent lenders who specialize in franchise
lending. Check out GE Capital Franchise Finance and Textron,
a couple of the larger independent sources.
Stop #5: The SBA Franchise
Registry. The real secret to bank financing for a
franchise investment is the SBA, which has very aggressively rolled
out its small-business lending guarantee program. Banks that
participate in this program can significantly reduce their lending
risks, because the SBA guarantees a large portion of the loan
against your failure or inability to repay the loan. Contact the
SBA and inquire at banks in your local area; this is a powerful
program for new business buyers.
The SBA has enhanced the power of its program by working with
franchisors to streamline the application and qualification
process, creating the SBA Franchise Registry. Go to www.franchiseregistry.com for a list of franchisors
that have registered their systems with this unique SBA program. If
your franchisor is one of the hundreds that are listed, you're
in luck--it'll save you lots of time and a ton of
paperwork.
Andrew A. Caffey is a franchise attorney in the Washington,
DC, area and a former general counsel for the International
Franchise Association. He is also the author of Franchises and Business Opportunities.