Financing Your Franchise

Franchise businesses are a great way for would-be entrepreneurs to easily and quickly enter the business world and secure their financial future.

First, franchises usually provide a proven business model meaning that many franchisees do not have to struggle during a start up period in ensuring the feasibility of their products, their market and their processes.

Second, brand. Many established franchisors have already spent the time and effort in educating the consuming public or your potential target market to the benefits of the products and services the franchise offers.

And, lastly, economies of scale. One issue that almost every new business owner faces is the ability or power to negotiate price reductions with suppliers or vendors. But, with the buying power of an entire franchise system (compared to a single business unit) franchisees are able to realize huge purchasing discounts from the very day they open their doors.

Over the last two years, many franchise concepts have struggled in this economy just as other traditional, stand alone businesses have. However, not all franchises are made the same and, as a result, not all have suffered the same. In fact, according to an October 2009 press release from FRANdata, the world's largest repository of franchise information and data, "The home health care industry is rapidly growing... What's more, demand for in-home care service is only expected to grow over the next decade as baby boomers continue to age and require assisted living services."

The bottom line is that while many franchise concepts have felt the same economic pinch that nearly all other businesses have, overall, as an industry, it seems that many franchises found it easier to weather the storm based on some of the particulars outlined above. In fact, according to Jason Daley (an Entrepreneur Magazine Contributor) 2010 and beyond is expected to see a modest recovery in franchise businesses such as fast food, tax prep and home repair not to mention the staples in the industry like pet care and products related to children.

But, while purchasing a franchise may be the best path for many would-be entrepreneurs, actually finding the financing for that purchase still remains a very high hurdle to overcome.

Many well known franchisors relied on preferred lender programs with national or international financial institutions. Here, the franchisor would essentially pre-sale its business model to banks and other national lenders. Thus, when a strong prospect for a new franchise appeared, the franchisor would simply send that person to their preferred lender or lenders.

However, many of these same preferred lender partners were the ones that got hit hardest during the financial crisis and as a result have either pulled back or stopped these preferred lending relationships.

Today, just like any business owner seeking financing, the capital or credit pool for franchises remains very shallow but it has not completely dried up.

Here are five potential avenues when seeking the financing to purchase or grow a franchise business:

1) Always start with the franchisor. Your franchisor only succeeds as the number of units they sell increase. And, if financing is a common problem, look to the franchisor to help you (the franchisee) solve that problem. There are still a few preferred lending programs with some of the largest, most well known franchise concepts. And, while these relationships have tighten, your franchisor will be a great source in helping you determine if you are a strong candidate for these programs - before you waste any time and effort in applying directly.

Moreover, many franchisors that have lost their preferred lender partners have turned to in-house financing programs - making approvals much easier as your lender (the franchisor) already understand the overall benefit and potential of the business as well as its long-term revenue generation ability.

2) SBA loans. The SBA loves franchises. First, they understand that the model is proven to work, second, that you, the franchisee, are not alone in business and have tons of resources at your disposal and third, the SBA knows that many franchisors will step in and either help the franchisee or take over the franchise should the individual business owner not be able to overcome its own obstacles.

When seeking either SBA or conventional loans, contact community or region banks first. Many of these financial institutions were not hurt by the financial market break down as they just simply did not have large amounts of toxic home mortgage loans in their portfolio. But, these same organizations, not having a lot of experience in funding franchise businesses, will need to be educated about your particular franchise and its potential in paying back a loan. This means more time and effort on your part in selling these lenders the business's ability to service the requested loan.

3) Franchise loan brokers. Brokers can be a great method in securing funding for your franchise. They understand the market and keep up with the latest trends; who's lending and who is not. Further, they can pre-approve you under certain programs as they understand both your situation and which program would serve your business best; saving you both time and trouble. Look at brokers like FranFund, Franchise Direct or FranChoice Inc.

4) Non-bank lenders. Most non-bank lenders receive their capital pools (the money they in turn lend out) from private investors. And, while these investors did pull back a bit during the recession, non-banks lenders seem to be recovering much faster than their traditional counterparts. Companies to look at are WingFinance, CIT or Diamond Financial Services.

5) Bootstrapping. A common practice of finding any way possible to scrap together the funding you need to either purchase or grow your franchise. Possible bootstrapping techniques could be loans from friends or family, finding local, private investors (think local Doctors, Lawyers, CPAs or other business owners who want to invest in their own communities), or using personal assets like home equity or the sale of a second home to get the financing you need.

In general, while franchises are great ways to jump right into business quickly and easily with proven products and tons of potential customers, franchisees are still facing the same financing hurdles as every other business. But, by knowing which avenues to approach for a franchise or business loan will not only save you time and money but may just get you that elusive 'Yes' approval; moving you one step closer to your dreams.