Franchise Funding Sources
Thinking of buying into a franchised business, but can't find the cash? Try these five common resources.
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"There are more things in life to worry about than justmoney--how to get hold of it, for example."
Investing in a franchised business can take a lot of money. Infact, the only really intimidating obstacle between you and yourdream of opening a successful franchise is financing. The very wordis enough to send prospective franchisees screaming into the night.Don't panic--here are all the stops on the way to getting yourfranchise financed.
Stop #1: Your Personal Resources. Conduct an assessmentof your own resources before you launch into your franchise idea.First, prepare a personal financial statement (on a generic formfrom your bank or an office supply store or by using your personalaccounting software). You'll use it over and over again as youline up your financing. Also, make copies of your tax returns forthe past two years--both the lender and a franchisor providingfinancing will want to see them. If your Uncle Doug once offered toback you in business, give him a call and take him to lunch. Besure of what you can count on--you can't afford to go into thebusiness with flimsy promises. Talk dollars and timing with goodol' Doug.
Stop #2: Your Accountant. If you don't have anaccountant, it's time to get one. Ask for references fromfriends and family, and find an experienced one who has handledsmall businesses (tip: Ask existing franchisees in your area forreferences). Arrange a preliminary interview, discuss your plans,and show the accountant your personal financial statement, theinvestment estimates from Item 7 of the UFOC and any Item 19earnings claim information in the UFOC. Talk about how you cancalculate a cash-flow picture of the business you're planningand how much financing you need. Ask the accountant to recommend abanker he or she has dealt with; usually accountants have greatleads for their clients.
Stop #3: The Franchisor. One thing can be said forfranchising as a method of expanding business: It has developed atried-and-true path for the individual investor. Financing is animportant part of that path. In about 30 percent of all systems,the franchisor itself will provide financing directly or through athird-party lender. If this is available from your franchisor,it's laid out fully in Item 10 of the UFOC. Even if the companydoes provide financing, it's likely to be for only a portion ofyour total needs. Time for Stop #4.
Stop #4: The Bank and Specialty Franchise Lenders.It's fair to say every small business needs a solid bankingrelationship. Even if you don't find financing at your localbank, you'll need to build a day-to-day service relationship.The place to start is the bank where you do your personal banking.Talk to a banker about your plans and explore their programs.
Also contact independent lenders who specialize in franchiselending. Check out GE Capital Franchise Finance and Textron,a couple of the larger independent sources.
Stop #5: The SBA Franchise Registry. The real secret tobank financing for a franchise investment is the SBA, which hasvery aggressively rolled out its small-business lending guaranteeprogram. Banks that participate in this program can significantlyreduce their lending risks, because the SBA guarantees a largeportion of the loan against your failure or inability to repay theloan. Contact the SBA and inquire at banks in your local area; thisis a powerful program for new business buyers.
The SBA has enhanced the power of its program by working withfranchisors to streamline the application and qualificationprocess, creating the SBA Franchise Registry. Go to www.franchiseregistry.com for a list of franchisorsthat have registered their systems with this unique SBA program. Ifyour franchisor is one of the hundreds that are listed, you'rein luck--it'll save you lots of time and a ton ofpaperwork.
Andrew A. Caffey is a franchise attorney in the Washington,DC, area and a former general counsel for the InternationalFranchise Association. He is also the author of Franchises andBusiness Opportunities (Entrepreneur Press).