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.
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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.
Niles Howard is a New Caanan, Connecticut, journalist
specializing in business and finance.
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