August 21, 2014
Credit is still tight in the U.S., making it especially difficult for small and medium-sized businesses to grow. This is no less true for entrepreneurs or business owners considering franchising their successful business. The lending industry continues to insist capital is available if you have good credit, adequate cash flow, and a lot of patience. Still, traditional sources of financing may not be viable–or even desirable–for everyone. You need a plan, a strategy and a guide.
You may be wondering what your strategy for obtaining franchising capital should include. Of course, you should work closely with a business attorney, an accountant, and perhaps even a franchising consultant (especially in this volatile economy), and the suggestions below are broad generalizations. Your mileage may vary. Still, here are some points to help you get started thinking about your franchise company’s financing strategy.
You need to create a clear picture of your company’s financial situation. Answer a few key questions, like, “What assets do we have,” and “How much debt do we have, and what kind is it, and what are the terms of repayment.” Also, you need to be thinking long-term. That means asking really though questions, too. For example:
- How much do you need to fund the franchise company’s operations in the first year? The first 3 years?
- When will your cash flow be in the black?
- How are you going to pay yourself and your bills during this time?
Of course, it’s nice to be able to say, “I’m going to be in the black in the first 18 months,” but can you back that up with reliable projections? You need to get all of this in place before you ever approach a potential financier or lender.
Franchisors can be a great source of information about where to get started. After all, they have a powerful incentive to help you. They want you earning a profit as soon as possible to generate royalties to pay to them.
Consider that lenders are risk-averse. They need to feel good about you and your company, and the numbers have to add up to real dollars and cents in a way that makes sense. If you have a realistic plan, a lender is going to be more confident in your legitimacy and competence than if you have an overly optimistic plan that might suggest you see the world through rose-colored glasses.
Other franchisees are another source of information you should tap into, especially if you already have a few networking connections. Reach out to those folks, and ask them about how they acquired franchising capital, who they would recommend, who they would avoid, and whether they have any advice or advisors you should heed. Learn from others’ mistakes.
Finally, consider multiple funding sources. Diversifying your debt portfolio can be almost as important and valuable as diversifying your investment portfolio. Different lenders may specialize in funding different kinds of deals. Some lenders focus on lending for franchise fees, while others focus on lending for the purchase of real estate or equipment or inventory. Plus, if you can get approved for one kind of loan, you might be able to leverage that success to convince another, different kind of lender that your venture is a sound investment for them.
The major sources of franchising capital, in no particular order, are:
- Investors and Business Partners, including Venture Capital (VC) firms;
- The Small Business Administration (SBA);
- Franchisors on the SBA’s franchise registry (in that they assist with SBA loans);
- Your own retirement funds, investments, etc. (Avoid this, if you can!);
- A Home Equity Line of Credit (HELOC);
- Banks and other traditional lenders;
- Franchise Loan Packagers;
- Equipment Leasing Companies;
- Landlords (tenant improvement allowances, free rent, or reduced rents if an anchor tenant moves out, etc.);
- Veterans (SBA’s Patriot Express Pilot Loan Initiative);
- The IFA Diversity Institute and MinorityFran;
- State and Local Governments and the Federal Government (often through grants, special loans, or special tax incentives); and
- Franchisors, themselves.
Whatever route you choose to acquire financing or other capital for your franchise company, make sure you, at least, have a business attorney review any contracts before you sign them to make sure you are aware of the risks. As a friend of mine, an Eagle Scout with 6 Palms, is fond of saying, “Proper Prior Planning Prevents Pitifully Poor Performance.” Preventive Law is all about addressing legal concerns before they become expensive legal problems. If you have a solid plan, you will find it much easier to obtain the franchising capital your new franchise company will need.
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