How To Finance Your Franchise

By:http://www.franchisingcity.it/

Lenders will look for a strong business plan and will expect the borrower to provide about one-third of the total capital required to fund the business. more…

In all cases, it is important to keep up-to-date on the current lending climate, particularly the rapidly changing choices in government guaranteed loans.

Regardless of the financing method you choose, you can be assured of two things: lenders will look for a strong business plan and will expect the borrower to provide about one-third of the total capital required to fund the business. For investors—given a general range of franchises costing from $150,000 to $600,000—this means being able to come up with $50,000 to $200,000 from personal sources (savings, stocks, bonds, pension plans, IRAs, personal property, and so on).

The primary routes to obtain financing for your franchise include:  

I THE U.S. SMALL BUSINESS ADMINISTRATION

The U.S. Small Business Administration (SBA) remains one of the greatest sources of financing available to franchising by offering competitive rates and generally longer terms than other sources. These loans are typically made by a private bank or other lending institution, with a portion of the loan guaranteed by the SBA. However, soaring demand for SBA-backed loans has forced the agency to take steps to stretch limited appropriation dollars. For example, in January 1995, the SBA placed a $500,000 cap on loans made through its popular 7(a) guaranteed loan program. Other resources are being considered to develop a permanent solution to these funding problems, including increasing fees lenders pay for government guarantees and removing the SBA from the Congressional appropriations process.

For franchise loans, both the private-sector lender making the loan and the SBA will want to review the FTC-required disclosure report provided by the franchisor on its franchise operations, as well as the franchise agreement. These reports contain information useful in evaluating the loan request, particularly on repayment ability. The SBA also maintains an automated database that allows them to make inquiries on franchise loan experience over a ten-year period nationally, regionally or by SBA district.

Among the many programs offered by the SBA, designed to meet a wide variety of small business needs, are:

 

The 7(a) Guaranteed Business Loan Program

The SBA’s popularity among franchisors and the small business community in general continues to soar, and the 7(a) loan program, in which the government guarantees loans made by private sector banks and other lending institutions, is leading the charge. The SBA set a record demand last year guaranteeing $8.2 billion in 7(a) loans. Through April 1995, the SBA guaranteed more than $5.24 billion worth of loans, putting the agency on pace to near an unprecedented $10 billion in fiscal 1995.

In fiscal year 1994, the SBA and lenders provided $8.2 billion in financing to small business, with seven percent (more than $570 million) going to franchise operations. With the 7(a) program growing at a rate of nearly 23 percent per year, the SBA offers an increasingly popular credit opportunity for franchise owners.

The SBA has also authorized 16 Small Business Lending Companies (SBLCs) to operate under the 7(a) guaranteed loan program. Many of the SBLCs are among the top volume lenders of SBA loans, and some have divisions that deal specifically with franchises.

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Low Documentation Loan Program

 

The Low Documentation Loan Program, known as LowDoc, is an offshoot of the 7(a) loan program designed to streamline the SBA loan process. Since its introduction in February of 1994, the LowDoc program has proven to be an efficient avenue for obtaining loans of $100,000 or less. LowDoc is the fastest growing SBA loan program and any small business eligible for a 7(a) loan can apply under LowDoc. As of April 1995, a total of 15,528 loans were approved under the LowDoc program.

Among the many advantages of the LowDoc program are a one-page application form and a quick approval process, with most applicants receiving a response within three days.

Applicants must demonstrate a solid understanding of the business, its operations and financial management, with an emphasis on character, credit history and relevant work experience.

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Certified Development Companies

 

The Certified Development Company (CDC) is a private non-profit organization licensed by the SBA as a source for providing 504 loans for small and medium-sized businesses. SBA 504 loans are available to companies that need financing for industrial or commercial buildings or for purchasing machinery or equipment. Established in 1981, the 504 loans have assisted approximately 15,000 businesses, creating more than 350,000 jobs.

A major advantage of the 504 program is that, in effect, the franchisee is really getting two loans and the borrower only needs to make a 10 percent down payment. A primary lender provides up to 50 percent of the mortgaged amount, with the CDC making a fully-guaranteed, second position loan for up to 40 percent of the mortgage.

 

Small Business Investment Companies (SBICs)

 

These SBA-licensed companies provide equity capital and long-term debt financing. SBICs tend to specialize in particular industries, look for a piece of the action and provide more direct involvement in the

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business operations.

 

II COMMERCIAL BANK LOANS

Of course, many commercial banks and other financial institutions still make small business loans on their own. But many banks are still reluctant to provide financing to small businesses, particularly in today’s highly-regulated banking environment.

III. DIRECT FINANCING/LOAN GUARANTEES FROM THE FRANCHISOR

About a third of franchise companies offer some form of financial assistance, and most will help the franchisee find a bank or other lender. Less common are direct financing programs, loan guarantees and a variety of leasing programs for property and equipment needed to operate the business.

Certainly, if the franchisor does not demonstrate at least some knowledge and expertise in financing assistance, then you should probably look for another franchise. At minimum, the franchisor should have a list of bank and non-bank lenders with which the company has good relations.

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