The second biggest question for a prospective franchisee (it comes right after Which franchise should I buy?) is, Where do I get the money to fund my franchise? We asked Stuart Johnson, 34, a Cousin's Subs franchisee and area developer in the Minneapolis/St. Paul Twin City area how he tackled the issue.
Franchise Zone: What financing avenues did you pursue when you were planning to purchase your first Cousin's Subs franchise?
Stuart Johnson: In 1997, we bought an existing unit that was a poor performer, so we got in cheaply. We were able to finance it through an SBA loan, which required 30 percent down on the transaction. I borrowed money from my family to help finance the 30 percent.
FZ: What has been the biggest challenge you've encountered so far with the financing process?
Johnson: We've grown very fast in the last three years, and we're finding it difficult to sell a bank on our fourth store because, while our cash flow is very strong, our debt-to-equity ratio is as high as 12:1. For us to grow at the pace we need to, we must pursue alternative financing institutions that lend based more on cash-flow performance than more traditional considerations.
FZ: You mention alternative financing options as opposed to more traditional ones. What do you see as some of the benefits of each?
Johnson: The SBA process is great for entry-level, start-up companies because it gives the bank a great deal of security. For a person who already has an existing business, however, I would suggest taking a look at alternative financing options based on cash-flow performance. Also, people should look to smaller community banks in addition to larger ones because the SBA process can bring along some hefty fees-1 to 3 percent in my experience.
And if you're trying to find alternative sources for financing, check out "In The Money," and see how these five franchisees raised their start-up capital.