Franchise Financing
Congratulations for investigating the world of franchising!
A franchise is a very predictable and safe way to enjoy the benefits of being an entrepreneur. Financing a franchise purchase is oftentimes a topic that people do not address early enough in the process. Although there are many great business and franchise opportunities available, how you finance your franchise venture often determines the level of success you will enjoy. Is your personal credit good? Do you have management or strong work experience? Can you invest 25% as a down payment toward the total cost of the business? Then, you should be able to receive funding toward a franchise investment. Traditionally, there have been several ways that people finance a business.
SBA Guaranteed Loans
The SBA simply works with banks to guarantee your loan. Your chances of obtaining a loan oftentimes improve when working with the SBA, however, it will likely be a little more expensive and time consuming to obtain this method of financing for your franchise.
A Bank Loan
A Bank Loan will need to be fully collateralized with assets such as stocks, bonds, real estate and other assets.
Home Equity Line of Credit
Perhaps you have home equity you could use to purchase a franchise. If you choose this loan don’t tell your banker you need the HELOC to buy a franchise. This could delay the process for you as it can raise many more questions.
Utilizing The Entrepreneur Pension ™
There is one method for financing a franchise that you may not be aware of. Guidant is the nation’s leading Retirement Account Facilitator and specializes in helping clients implement unique funding solutions for their franchise purchases. We can help you access your Retirement Funds to purchase a business without being subject to taxes or penalties! Redirect your retirement funds to a more productive investment. No withdrawal or distribution here – simply invest your IRA or 401(k) into your new franchise! Avoid business debt! By using your retirement plan you can avoid getting a loan, stripping equity from your home and/or draining your available cash. Invest in yourself. The stock market has proven time and time again that no one cares about your money and investments more than you do. Not only can we show you how to invest your retirement account(s) into your new franchise – we can show you how to return franchise profits to your plan and receive a favorable Letter of Determination from the IRS!
- Q: I’ve found the franchise I want, but I don’t have enough cash to completely fund the startup of the business, so I’m going to need to get a loan. I’m just starting to talk to banks, and they seem to want a number of things I don’t have, such as a business plan with projections for the business. They also expect me to personally guarantee the loan even though the business is a corporation. Is my best option to use the SBA in order to avoid these hassles, or what should I do?
- A: This is the number-one topic of questions we receive. The best source of information about your financing options is the franchisor. They should be able to tell you, from experience, how likely it is for you to obtain financing from any particular source. It may also be helpful to understand the principles that underlie your ability to get financing, regardless of the lending source. There are "Cs" involved in any decision to loan money to someone: Cash, Credit, Collateral and Character. The fact is that it doesn’t matter whether you go to a bank, use the SBA guarantee service or go to a friend or relative for the loan.
The same basic rules apply to any successful attempt to get credit. Here’s how the four Cs work:
- Cash. One of the most common misconceptions people have is that they can borrow all the money they need to open a business. Unless your personal net worth is far larger than what you need to borrow, this is almost certainly not true. For SBA loans, you’ll most likely have to come up with funds—either from your own assets or other sources—probably equal to 25 to 30 percent of the total investment needed to start the business before the SBA will consider lending to you. Lenders like to make sure you personally have "skin in the game."
- Credit. Another thing lenders insist on is a strong credit history. This means they want to see a track record of you borrowing money and making your payments on time. Though your home mortgage might be the best example of a large loan you have serviced well. Everyone realizes most people will take care of their mortgage before their other bills. So what they really want to see is a pattern involving timely payments on other types of loans. While a good credit history doesn’t mean you’ll get a loan, a bad one almost guarantees that you won’t.
- Collateral. Most lenders require you to secure any loan you want with assets sufficient to provide for 100 percent recovery if you default on the loan. In many cases, franchisors can recommend lenders with whom they have had a good experience. This may include someone other than a direct lender—since these firms are often able to select the best source of financing from a pool of aggressive lenders. These firms are very familiar with Small Business Administration guaranteed loans. It doesn’t matter whether your business is a corporation or another entity, or whether you go through the SBA process—they are going to look to you for collateral.
- Character. The final condition relates to your character or reputation. Frankly, this is like your credit history—having great character won’t ensure you’ll receive a loan, but having a bad reputation will almost guarantee that you won’t. Having strong character and a good reputation used to be enough to offset a lack in the other Cs, but that changed with the S&L crisis in the 80’s, at least as far as any regulated lender is concerned.
You also mentioned a lender’s request for a business plan. You should have a business plan before embarking on any new business startup for a host of reasons besides just financing. If you don’t have one, stop everything else and put one together.
The franchisor you’re working with should have a lot of helpful information or even a template already developed for this purpose. Many franchisors have also set up programs with selected financial sources to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process smoothly. The first thing you should do, once you’re fairly certain you’ve found the franchise you want to buy, is to request this information from the franchisor and start looking into your options.
Franchise-Specific VA and SBA Loans
The USA-Department of Veterans Affairs (VA) began the Veterans Financial Franchise Initiative (VetFran) in the early 1990s as a way for franchisors to thank members of the military for their service during the Gulf War. VetFran allows service members to pay only 10% or less of the total initial investment cost of purchasing a franchise. The USA Small Business Admiinistation (SBA) Franchise Registry is a central registry of franchise systems eligible for SBA loan guarantees. Since registry franchisors have been preapproved, the processing time for a franchisee loan is shortened. A franchisee requesting SBA financial assistance needs to provide a one-page certification from the franchisor stating that the prospective franchisee’s contract is the same as the form approved by the registry. The VetFran program is limited to franchises with initial investments of $150,000 or less. The franchisee must be able to qualify for an SBA 85% loan guarantee package. The difference between the required franchise fee and what the franchisee invests is contributed by the participating franchisor as part of an "initial earned equity". Many International Franchise Association (IFA) members participate in the program.
The Small Business Administration (SBA) Registry lists names of franchise companies pre-registered and reviewed so that SBA loan applications can be processed quickly and efficiently.
Listing on this Registry means that the franchise agreement does not impose unacceptable control provisions on a franchisee. The lender and/or SBA must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, creditworthiness, conflicts of interest, character, use of proceeds and allocation.
We can provide you with a list of franchises on the SBA Registry. To be eligible for an SBA loan, the borrower must meet these criteria:
- A strong business plan - Like banks and other financial institutions, the SBA requires the submission of a business plan to see that the entrepreneur possesses a clear understanding of the business he’s/she is in, has taken steps to research the market, and has studied the prospects of the business. The SBA wants to see detailed plans on how the business will make money and repay the loan.
- A good personal credit rating - Credit history serves as a person’s gauge for credit worthiness. The borrower’s track record in paying their bills is an important component in the loan application process. The SBA partner banks, which provide the money, conduct a credit examination of the borrower then submit the results to the SBA.
- The borrower must have a stake in the business - The SBA wants to see those applying for credit have a personal investment in their business. In the SBA’s view, business owners who have put their own money into the venture are much more likely to succeed in their business. The SBA will require that the borrower contribute at least 25% of the investment from his or her personal assets.