Financing Your Franchise Use these resources to gather the capital to get started.

One of the most important aspects of opening a franchise isusually the least enjoyable. Figuring out how to finance afranchise venture can cause many headaches and sleepless nights,and creates plenty of questions without simple answers.

Fortunately for today's potential franchisees, financing ismuch easier to find than it was just 20 years ago. Many oftoday's lenders understand the special needs of franchiseesseeking financing, and many have targeted franchisees as a growing,desirable market.

Just ask franchisee Doc Cohen. When he sought financing for aGreat American Cookie Co. franchise in 1978, lenders were anythingbut receptive.

"Cookies were a relatively new retail concept, and thebankers would laugh at me and say, `You want us to lend you moneyto sell cookies? Do you know how many cookies you need to sell topay the rent?' "

Cohen is the one laughing now; he owns 28 Great American CookieCo. franchises, from Colorado to Florida. "There's a lotof dough in cookies," he says. "All my stores are doingreally well."

Cohen couldn't get traditional financing to open his firststore, but he did manage to raise $35,000 from family members andpersonal savings accounts. By gathering more than half his start-upcosts, he proved to an equipment leasing company he was seriousabout the venture, and they granted him a $30,000 equipmentlease.

After six months, business was phenomenal for Cohen. With aproven track record, he was able to go to his local banker and getfinancing for his second store--and the 26 after that.

AT&T Capital Corp., an international provider of leasing andfinancing programs for a wide range of businesses, introduced afranchisee lending program in April called Franchise One.

"We look at franchisees as a separate market with adistinct set of needs," says Bob Neagle, senior vice presidentof marketing and business development at AT&T Capital Corp. inMorristown, New Jersey. "We find franchisees desirable asrecipients of loans, because the franchise market continues togrow. And not only do franchisees need start-up assistance, theywill continue to need assistance as they grow."

With an established franchise, franchisees have an easier timefinding financing than independent business owners do, says DonDeBolt, president of the International Franchise Association (IFA)in Washington, DC. "A franchisee has a more bankable loan thanthe independent businessperson, because the franchise has a trackrecord," he says. "Banks track all loans, and the defaultrates are lower with franchises than with independentbusinesses."

Funding for your franchise can come in a variety of forms,including help from the Small Business Administration (SBA), bankloans, a franchisor that offers financing or one that refersfranchisees to lenders that understand their needs. Before youobtain any financing, however, you'll need to consider some ofthe questions every lender asks and the items they'llrequire.

Julie Bawden Davis profiled nine mobile businesses in theAugust issue of Business Start-Ups.

What Franchise Lenders Look For

"Most lenders will first consider the four C's oflending, which are capacity, collateral, credit andcharacter," DeBolt says.

Capacity refers to whether or not you can repay the debt,which will mean examining your potential earnings and expenses.

Collateral is an insurance policy for the bank. It refersto any property you own that the bank may hold if you're unableto repay your loan.

Your credit history will give lenders an indication ofwhether or not you're likely to repay your debt. They'llcheck your credit report to see how much you owe, how often youborrow and whether or not you pay your bills on time.

Lenders look at your payment history, and they'll takelawsuits, bankruptcies and tax liens very seriously whenconsidering your character. They'll also do a backgroundcheck and evaluate your previous work experience. Experience in thefranchise industry can work in your favor.

Lenders also scrutinize the management skills of franchisees,Neagle says. "We look for quality, professional peoplewho'll make a significant commitment to the business and whohave a good, sound business plan that has sustainability," hesays. "We also look for lenders who'll be investing someof their own money, which shows they have faith in thebusiness' success, and we look at the overall stability of thefranchise itself."

Most lenders require you to show them a business plan thatspells out your goals for the franchise's growth andprofitability, and to explain how much money you'll need.You'll usually have to provide three years' worth of taxreturns; a cover letter describing what you're looking for,including the loan amount and how you intend to repay it; apersonal financial statement; and financial projections. The latterfigures are estimates of how much you expect to earn and what youbelieve your expenses will be, which can be estimated by talking toother franchisees who have bought the same franchise in similarmarkets.

Putting the results of your research on paper is necessary, saysEdina, Minnesota, franchisee Jim Gendreau, who has owned manyfranchises over the past 14 years, including, at one time, morethan 50 Cost-Cutters Family Hair Care salons.

"You can't just give potential lenders an advertisingbrochure, say you called three or four franchisees and that youthink you'll do well," he says. "It's importantto sell your idea to your lender with facts and figures."

If you need help developing your business plan, there areseveral places you can turn.

"In many instances, existing franchisees will be happy toshare their business plans with you," DeBolt says. Franchisorsalso offer some help; many will refer you to consultants they haveon hand to answer questions. Consult with business experts, andcontact other franchises for information such as typical storesales and cost of goods.

"Consult with a franchisor or an independent accountant toreview your plan critically," Neagle urges. "Compare yourprojections against comparable store projections."

Or you could gather your own advisory board, as Gendreau didrecently while working on his business plan for a new franchise. Heasked five businesspeople for assistance: a business attorney, aCPA, a mergers and acquisitions expert, an advertising executiveand a business writer. They've advised him on his businessproposal, free of charge. Initially, Gendreau's relationshipwith these advisors was a kind of mentorship. Over time, he'smade the relationships reciprocal, and now regularly returns thefavors by providing his own expertise, also free of charge.

Once you've got your business plan in hand, it's time tochoose the financing option that's best for you. Consider thefollowing choices:

The Small Business Administration (SBA)

The SBA is one of the greatest sources of financing available tofranchisees. SBA loans are typically made by a private bank orother lending institution, with a portion of the loan guaranteed bythe SBA. The 7(a) Guaranteed Business Loan Program is popular amongfranchisees. Within this program, the government guarantees loansmade to franchisees and other small-business owners who can'tobtain financing on reasonable terms through other channels.Lenders approve and service the loans after the SBA has issued aguarantee.

The SBA also offers pre-qualification loans for women andminorities. Within these programs, the SBA prequalifies women andminorities before they approach lenders. Rather than collateral,the programs focus on each applicant's character, credit,experience and reliability.

"Say a woman has been an office manager for a franchise forseveral years, and her boss offers to sell her the business,"says Vicki May, an economic development specialist at the SantaAna, California, office of the SBA. "Although she has neverowned a business before and doesn't have the standardcollateral, she has worked on-site and knows how the businessoperates. If she also has good personal credit and reliability, asfar as paying her bills in a timely manner, she would be consideredfor a loan."

Franchisors That Offer Financing

A few franchisors offer innovative financing programs forfranchisees. Valvoline Instant Oil Change Franchising Inc., whichruns more than 500 franchised and company-owned auto oil-change andfluid-maintenance shops, offers a variety of franchise financingoptions.

"We've found that financing is a big motivator,"says Les Fry, a franchise sales representative for Valvoline,"because it gives our franchisees options, especially thosefranchisees who wish to grow and build more centers. Financingallows them to expand at the pace they want."

Valvoline's lease-financing program offers franchisees a100-percent-financed leaseback program for land and buildingdevelopment, which can mean much lower upfront costs. "Theaverage construction cost for a center is about $500,000, and mostbanks require at least 25 percent down, which would mean aninvestment of $125,000," Fry says. "The 100-percentfinancing eliminates that initial out-of-pocket expense."

Valvoline also offers a mortgage-based finance program forfranchisees who wish to purchase rather than lease a station andland. This program is open to franchisees who've been operatinga Valvoline center for at least 18 months, or who've beenworking in a similar quick-lube business as an independent operatorfor at least three years. It allows franchisees to get started withjust 15 percent down, by offering loans that cover up to 85 percentof the cost of development of the center. Valvoline also offerslease programs for signs, computers and lube equipment.

Memphis, Tennessee-based Service-Master, fran-chisor of theAmeriSpec home-inspection service, Furniture Med-ic, Merry Maids,ServiceMaster Residential/Commercial Cleaning Services andTruGreen-ChemLawn concepts, has offered franchisees financing for10 years.

Through its own financing company, ServiceMaster Acceptance Co.(SMAC), it lends qualified franchisees up to 70 percent of thefranchise fee and equipment package.

The program allows franchisees to retain more working capital,says Bob Burdge, director of market expansion for residential andcommercial services at ServiceMaster. "Of those franchiseeswho finance, 95 percent or more get a loan through SMAC," hesays.

Other franchisors offer equipment financing on a more limitedbasis. Mail Boxes Etc., a San Diego-based postal and office-supplystore franchisor, for example, offers up to 100-percent financingfor as much as $30,000 in equipment. This program was started tofree up money so franchisees would have more working capital, saysPatti Durham, spokesperson for Mail Boxes Etc.

Franchisor-Preferred Lenders

Many franchisors, while not directly involved in financing, haveestablished preferred relationships with banks and other lenders.These institutions have financed loans for other franchisees in thesame system, and their experience helps them process future loansto the franchisee's best advantage.

"Preferred lenders are up to speed with what a franchiserequires," DeBolt says. "They know about the bankabilityof the loans and the specific needs of that particularfranchise."

Dunkin' Donuts offers a program that provides franchiseesfinancing through two national preferred lenders. The program isavailable in select markets and provides up to 75 percent of theprojected costs to franchisees for developing their networks,including initial franchise fees, working capital, leaseholdimprovements, vehicles and equipment. Once franchisees complete anevaluation process, they're eligible to apply for financingfrom a preferred lender, who then makes an independent creditreview. Because Dunkin' Donuts provides a limited guarantee toeach of its sponsored lenders and covers a portion of each loan, itcharges a program fee.

To find preferred lenders, it's best to call the franchiseyou're interested in and ask if they have one. You can alsoconsult the franchise company's Uniform Franchise OfferingCircular (UFOC), a comprehensive disclosure document about afranchised company, for information.

If a franchisor doesn't have a preferred lender, potentialfranchisees can often find a willing lender by approaching banksthat have loaned money to other franchisees in the system. Chancesare, the lender will be receptive. To find such franchisees,consult the UFOC.

Franchise Financing Specialists

Some lending institutions, including banks and financecompanies, specialize in franchise financing or have specificdepartments that do so.

One such lender is Franchise Mortgage Acceptance Co. (FMAC),which has loaned $1.3 billion to franchisees since it started inMarch 1991. It expects to loan $700 million to $800 million inloans this year. "We are a preferred lender to manyfranchises," says FMAC founder and president, Buz Knyal."We loan money to more than 100 separate franchise conceptsand have more than 130 employees on staff."

Both FMAC and AT&T Capital Corp. screen franchisees byclosely evaluating them for the four C's of credit mentionedearlier.

"We look at a franchisee's character and credithistory," Knyal says, "as well as the financial strengthof the franchisor."

The likelihood of finding financing for your franchise today isbetter than ever. Most lenders realize that loaning to franchiseescan be a worthy investment. Take advantage of this opportunity inthe marketplace when looking for funds for your new business.

Franchise Guidance

Entrepreneur Magazine's Franchise Special is avaluable guide that includes everything from start-up costs andfranchise fees to company growth, current trends and contactinformation, with listings of more than 1,400 franchises andbusiness opportunities. Published by Entrepreneur Media Inc., theguide also provides information on legal issues, availablefinancing and what to do before buying a franchise or businessopportunity. Look for it on newsstands starting September 2,1997.

Contact Sources

AT&T Capital Corp., 44 Whippany Rd., Morristown, NJ 07962,(201) 397-4073

Cost-Cutters Family Hair Care, 7385 Bush Lake Rd., Edina, MN55439, (612) 941-7773

International Franchise Association, 1350 New York Ave. N.W.,#900, Washington, DC 20005, (202) 628-8000

Mail Boxes Etc., 6060 Cornerstone Ct. W., San Diego, CA 92121,(619) 455-8800

ServiceMaster, 860 Ridge Lake Blvd., Memphis, TN 38120, (800)230-2360

Small Business Administration, 200 W. Santa Ana Blvd., #700,Santa Ana, CA 92701, (714) 550-7420

Valvoline Instant Oil Change Franchising Inc., 3499 Dabney Dr.,Lexington, KY 40509, (800) 622-6846