Five Real-Life Franchise Funding Success Stories Having trouble landing your share of funding? These true-life stories will show you how five other entrepreneurs did it.

You've read the literature, done your due diligenceconsidered the statistics on success, and know a franchise is theway you want to get into business.

But before you sign on the dotted line, answer this questionfirst: Where will you get the money to finance the franchise androyalty fees, inventory and working capital?

We asked five franchisees across the nation how they financedtheir businesses and came up with some traditional as well as somedistinctive solutions to this often problematic issue.

Private Matters

Franchising seems to be infectious, at least for 40-year-oldDouglas York. After spending several years as a contractor whoseassignments included constructing a number of stores forfranchisors nationwide, he decided to get involved in the finishedproduct. Joining forces with his wife, Frances, a licensedcosmetologist, York purchased a Great Clips franchise inJacksonville, Florida.

"When we got into Great Clips, you could do three stores intwo years [as a discount package]," says York, who opened theallotted stores in June 1998, December 1998 and this April,surpassing his commitment with a fourth location in July.

The father of three had to come up with $120,000 for eachlocation and decided to go with the nonbank lender his franchisorrecommended. "Textron Financial gave us a loan based strictlyon equipment without a ton of paperwork," explains York."I did talk to banks, but they couldn't offer anythingbetter than Textron, and with Textron, I didn't have to put upmy house [as collateral]."

To open his first store, York secured $60,000 from Textron bysubmitting two years-worth of tax returns and his personal savingsto complete the $120,000 investment. "You shouldn'tfinance yourself to the hilt," York says. "You have toleave yourself a little room to maneuver."

Family Ties

Friends, family and your own resources are typically your firstoptions when it comes to financing a business. This wasparticularly true for Paula Bush and Christina Domecq.

Domecq, who started her New Horizons Computer Learning Center inWhite Plains, New York, in May 1998, now employs 35 people andprojects $2.3 million in sales for this year.

To achieve this high level of success, the 22-year-oldentrepreneur had to first tap the family coffers for the $500,000start-up cash the franchisor required.

"I tried to get an SBA loan, and they flat out told me nobecause I was too young and didn't own a house," saysDomecq, who began honing her entrepreneurial skills at age 16 whileworking for her father's wine and spirits distributioncompany.

In addition to the SBA, Domecq approached banks and even a loanbroker, with similar results. So she turned to her family: an aunt,a grandmother and her dad. "They loaned me the money, andI'm paying them back with interest at the prime rate,"says Domecq.

But Domecq admits convincing her father to ante up was no easytask. His major concerns? "I was young, and I wan't abusiness major in college," she says. What finally convincedhim was Domecq's carefully researched, 120-page business planand the savvy management team she had assembled.

Instead of accepting her family's money on a handshakearrangement, Domecq got a lawyer to create loan papers for eachrelative. "That's not because my family isn'tclose," explains Domecq. It was simply to keep the transactionprofessional.

Paula Bush also went to a relative for the money she needed tostart her Pressed4Time dry cleaning and shoe repair pick-up anddelivery franchise. Unlike Domecq, however, Bush doesn't haveto repay her mother the $12,000 she borrowed. But that doesn'tmean she went to the "Bank of Mom" unprepared. "Mymother has always been my mentor and friend, and when I decided togo into business for myself in 1997, she was supportive bothemotionally and financially," says the Methuen, Massachusettsentrepreneur.

Bush explained to her mother what she wanted to do and showedher her business plan. "She was never concerned about beingrepaid but asked questions about how I was going to be paid by thecustomers. I could easily answer her questions, because I had askedthe same questions myself before I made the decision toinvest." In addition to showing her mother a business plan,Bush also had to check the laws governing how much money her momcould give her as a gift without paying a penalty.

Bush's gamble paid off: The 54-year-old former sales rep wasable to start drawing a salary in only her third month in businessand is currently generating sales of $12,000 a month.

ABCs of SBA

Once a retailer, always a retailer could be aptly be called thethem of Brian McDowell's life. After spending more than twodecades progressing from the lowliest clerk position at Kmart atage 16 to president and co-owner of Michael's Stores Inc.'s17-store Canadian division. McDowell began contemplating otherpaths. "I looked at Subway and an oil-lube place,"remembers the 41-year old, who left the art-supply company when heand his partners were bought out.

During his search, McDowell ran into a friend who had purchaseda collectibles franchise called Country Clutter. "It seemedlike a lot of fun. You could purchase merchandise whenever andwherever you wanted as long as it fit the motif of the store,"he says. He liked the idea so much, he's developing not one,but two stores simultaneously. "I arranged to get theGlendale, California, location, and while that was going on,Orange, [California,] store came up."

McDowell provided about one-third of the start-up investment,approximately $300,000 per location, himself. The remainder came inthe form of an SBA-guaranteed loan.

And although he'd heard the horror stories associated withSBA loans, McDowell's experience was good. "Obtaining theloan was no more difficult than I thought it would be," hesays, crediting the smoothness of his application process to hisdecision to use a loan broker. "She did a lot of the work andknew where to shop [the loan]."

McDowell's strong credit report and years of retailingexperience were also important factors in his favor, as was CountryClutter's solid business history. McDowell eventually pledged acertificate of deposit as collateral for one store and his home forthe other.

His advice to prospective franchisees? Put yourself in thebanker's shoes. "What if you had $200,000 and someonewanted to borrow it? I would want to know a heck of a lot aboutthem and how they were going to pay it back!"

Financed by an Angel

You might think finding an angel investor for your franchisewould require divine intervention, but Denver entrepreneur BarneyRudden knows what it really takes is connections.

It was a formula my dad had used for a long time," says28-year-old Rudden of the interent plus return-on-investmentcombination has used to entice 15 angels to invest a total of$300,000 in his first Colortyme rent-to-own franchise in 1995."I didn't try other routes because I was just out ofcollege and didn't have an established credit history or any ofthe other requirements [for a traditional loan]."

But Rudden did have a father who had been in the rent-to-ownindustry more than two decades. More important, his dad had friendswho were willing to take a chance on a Young Turk with a collegedegree and six month's experience under his father'stutelage. "I also met quite a few people through my wife, whoworks at a mortgage brokerage in Denver," says Rudden.

After all his campaigning and presentations, Rudden hadassembled a group of investors comprised of older family friendsand thirty-somethings who liked the idea of backing a youngentrepreneur. Acknowledging that the combination of 40 percentinterest in the store coupled with guaranteed annual interestpayments of 12 percent, paid monthly, was an unusual incentive,Rudden says the package had to be attractive to overcome thereluctance people might have had because of his youth.

To sweeten the pot even further for interested investors, he putinterest payments in an account in their kids' names. "So14 years down the road, their children's college tuition ispaid," says Rudden. Among the other attributes of his packageare a concrete exit strategy and the first right of refusal toinvest in additional locations.

Although he liked the formula for his first two stores, Ruddendecided to make a change when he opened his third store in Hemet,California, this past April. He scaled back to four investors andadded third-party financing. "I'm changing the formula soI won't have as many investors," says Rudden, who isconvinced he couldn't have opened his stores any other way."Now I only need to raise $100,000 instead of$300,000."

Out With the Old

Why are fewer franchisees turning to traditional commercialloans for assistance? For one good reason: Obtaining a commercialloan to finance a franchise is as easy as finding the proverbialneedle in a haystack. Banks are looking for a collaterized loan,and typically in a franchise, there's no real estate involved;it's a leased facility," explains Kirk Fullerton, seniorvice president and manager of the SBA lending group at Dallas-basedCompass Bank.

Banks want businesses to have three basic qualifications,according to Fullerton: reasonable financial strength and goodpersonal credit of business owners, as well as quality projections.Consequently, says Fullerton, "they have a problem with astart-up on the front end." He adds that most banks are onlywilling to go three years on a loan without a governmentguarantee--bad news for franchisees, who typically look for termsof seven to 10 years.

When it comes to collateral, Fullerton says banks want a provencash-flow stream, and even with the backing of a franchise system,there are still the issues of mismanagement and an unprofitablemarket.

Consequently, if you want a non-SBA loan from your local bank,be prepared to supply strong collateral that guarantees the bankrepayment in case your business fails.