Many prospective franchisees will need to finance part or all of their purchase of a new franchised business. Traditional lending sources are available but the restrictions related to financing any new business startup, even a franchised business, are stringent.
When researching how to finance a franchise, the best source of information about financing options is the franchisor. This is an issue that the franchisor has addressed numerous times with other franchisees and they will have a great deal of information about the practical options that are available.
In today’s market, most traditional lending sources and programs are simply not available for new franchise startups. This is true regardless of the credit rating or score of the borrower and/or the type and amount of collateral that a person might have to secure the loan. In such a climate, the financing options are usually limited to one of the following approaches:
The Retirement Plan Option
If you have significant balances in your IRA, 401K or other retirement plans, there are programs you can establish that allow you to access these funds to invest in starting your own new franchise business. This funding solution, which is performed by a handful of experienced and qualified professional organizations across the country, is a combination of a retirement plan and a corporation.
In this type of program, your retirement account invests by buying stock in a new corporation you set up to own and operate your franchise business. As your franchise becomes profitable, your retirement account will realize gains based on its stock ownership, on a tax deferred basis.
This financing tool allows you to purchase a franchise without applying for or obtaining a loan. It also saves you the paperwork and overhead associated with creating debt from a traditional source, keeping your overhead low and allowing your franchise to prosper at a higher level. Your FranChoice consultant can refer you to a number of companies that set up such plans in complete compliance with the ERISA Act of 1974 and IRS regulations.
Local or Regional Bank Option
There are a number of local or regional banks that still occasionally make new business start up loans. Realistically, you will need to have a stellar credit history and rating plus fantastic collateral before they will even consider you, but that still beats the national banks which simply are not making such loans at this time.
If you wish to pursue this option, focus on creating or building a relationship with an individual banker. In today’s climate you need someone within the bank that will be your “champion” in terms of arguing in favor of the loan. If you don’t already have a banker relationship you can use, then you should leverage your local contacts in order to get referrals to bankers from other people who do have such a relationship. If you are introduced to the banker as a great person by someone the banker already knows and respects, it will go a long way toward helping you find your champion.
Last but not least, beware that this process is potentially very frustrating. Due to the nature of the beast with banks in this market, you should plan to develop multiple potential sources to pursue all at once. Most likely, majority of them will turn you down regardless of your qualifications – and you’ll want a back-up or two.
Another avenue you might explore is to find an “Angel” investor or lender that will provide the funds you need for your business startup. Even though the economic times are very tough, there is a great deal of money in the market sitting on the sidelines looking for a decent place to be invested.
If you can find an individual with such resources, and if you have strong credit and great collateral, it is a relatively straightforward process to pitch a loan proposal with success. Your best source for finding such a person is probably a referral from someone you know. Ask your attorney, accountant, banker and other professional advisors for referrals to such a person.
The Partner Option
The first step to finding a partner to help finance your business startup is to ask yourself if you know someone, a friend, relative or acquaintance, that would potentially be willing to back you with the resources needed to start a business. If you think of someone that is a possibility, discuss this idea with them and determine the circumstances under which they would be willing to participate and the amount of resources they might be willing to invest.
This option will enable you to pursue a franchise opportunity right away since you can add your partner’s assets to your own in order to meet the minimum standards necessary to pursue the business. The disadvantage is that the partner will usually own part or even the majority of the resulting business since they put up the money.
The Savings Option
As a final option if none of the above are available to you, you can save your way to success. If you don't have the funds necessary to purchase a franchise, but are very interested in someday doing so, you need to start preparing today by saving everything you can. This is the surest method for most people, though it will take discipline and patience on your part.
The key is to build your net worth and asset base so that you have something you can leverage in the future. Go down to your bank and set up a "business ownership" account. The secret to this account is that you won't touch whatever funds you put into it until you're ready to invest in a business of your own. Start the account with all the funds that you currently have available. Next, put a fixed amount of at least $500 into this account from each monthly paycheck (direct deposit would be best). Never miss a deposit.
This may seem like a slow road to travel but it serves two purposes. First, you'll be surprised at how fast the money will grow. Second, it gives you a key piece that you need to begin working with bankers and franchisors to put financing options together.
To get financing, you must have equity, credit or credibility. The first two are obviously missing or you wouldn't be reading this section. Assuming this is true, the third is the easiest to get. After as little as six months to a year of following the savings plan as outlined above, you will have established a track record that shows you are serious about owning a franchise.
At this point you can contact franchisors directly or use a consulting service provided by FranChoice to see what options exist for you. Even if you find that you'll have to keep saving for a while longer, you'll still be on your way to making your dream of owning your own business come true!