Starting a Franchise But Need Financing? Here's What to Do.
In theory, getting a loan for a franchise business should be easier than financing a new startup. You have brand recognition, a proven track record and hard data on your side. But even when armed with franchise facts and figures, convincing someone to lend you north of $350,000 -- the typical loan amount for a franchise startup -- is an intense process.
“Most of these people are getting into business for the first time, and this can be a scary process,” says Anthony Byrd, director of business development at DCV Franchise Group, a California-based advisory firm that helps secure Small Business Administration (SBA) loans and serves as matchmaker between banks, franchise
systems and business owners. “We’re the last piece of the puzzle that allows an entrepreneur’s dreams to come true,” he says.
There’s a lot to know about securing a loan. SBA loans, for example, are guaranteed by the federal government and come with low interest rates, but they’re not easy to come by. Banks want a wealth of info on your personal finances, credit history and collateral, which Byrd says often catches applicants by surprise. If you’re a new franchisee and in need of cash, here’s his advice (whether or not you hire an advisory firm).
1. Get help finding a lender.
Many franchisors have a relationship with a funding partner like DCV that can help new franchisees get prequalified for a loan. If they don’t, it’s a potential red flag for franchisees, Byrd says. (If you want more options, the International Franchise Association hosts an online directory of approved financial services companies.) Even if you already have a good relationship with a lender, expert advice never hurt anyone. Byrd recalls one client whose local credit union offered a nice-sounding loan -- but the payments would have been sky-high. “She would’ve been so underwater, it’s not even funny.”
2. Target your pitch.
“Every bank is looking for a different type of borrower and a different type of franchise concept,” Byrd says. For example, he’s found that one well-known national bank prefers service- or fitness-industry concepts over food-related startups. Entrepreneurs who know this (or learn it from a finance consultant) can spare themselves a lot of time schlepping from bank to bank.
3. Build your case with data.
Your franchisor can -- and should -- provide data on how businesses like the one you’re trying to open have performed. When making the case to a lender, data can be critical: Byrd says he sometimes encounters loan officers who make knee-jerk denials on franchise loans based on their own perception of the brand. The quickest way to overcome that bias is with numbers.
4. Be patient.
Many franchisees aspire to own multiple units -- and in fact, of every 10 franchise agreements Byrd sees, about seven are multi-unit. But banks generally aren’t comfortable lending a new franchisee money for multiple businesses at the same time. They want to make sure you can run one unit successfully for at least six months first. “Learn your business, understand it and then come back and get the funding for that second unit,” Byrd says.