How are you going to finance your first franchise purchase?
New franchises are opening every day, and that money has to come from somewhere. It isn’t easy but there are various ways of coming up with start-up capital.
On Your Own
1. Refinancing your home or taking out home-equity loans
This is fine if the franchise you choose is so inexpensive that you can cover the franchise fee and total investment (rent, equipment, supplies, employee salaries, your own living expenses and advertising) yourself. But should you need to borrow money later, your lender will want you to put up collateral, and a fully mortgaged house doesn’t qualify. Finance experts suggest you borrow only a portion of the available equity, and leave at least 25% of your home’s value intact.
2.Severance packages or savings
Down-sized executives often use their severance packages or savings to get started. Retirees without separate savings can tap into their individual retirement accounts without a tax penalty. This option can be really tricky, and should not be attempted without play-by-play assistance from an accountant.
Through a loan
Prospective franchisees who qualify can borrow start-up capital through a loan. Banks are usually open to granting loans to start-ups who are purchasing loans as they are buying into proven concepts. Most banks have a dedicated franchising unit which can also provide useful information before purchasing your first franchise.
Once a bank has had a good experience with a franchise loan, it tends to loan money to more franchisees from the same concept. Begin your financing search by talking to your potential franchisor about banking relationships and asking existing franchisees where they obtained financing.
But if the system you choose has no strong lender ties, you’ll have to build a personal relationship with a local lender.
Friends & Family
If you have spotty credit, are dealing with a new franchise company with no earnings history, or don’t own a house or even a Harley, it’s unlikely a bank will loan you money. The last stop on your financing hunt is Mom, Dad, Uncle Dan and Jim, that high-school loser who made a killing in tech stocks.
Friendships and families can be torn apart by such transactions, if not handled correctly. Here are some tips to keep your relationships intact:
- Put together a business plan, including a two-year monthly forecast of your sales and expenses. Include what you’re asking of your investors, what they’ll get in return, and when they’ll get their equity back — probably not until you sell, qualify for a conventional loan, or attract the attention of one of those multimillion-rand private-equity firms.
- Don’t build up their expectations; explain all the risks and never take money from a relative or friend who can’t afford to lose the entire sum.
- Have an attorney who understands securities draw up a formal contract. Then if something goes wrong, it won’t come as a big shock — and you can still sit down together at holiday meals
10 Franchise Financing Tips:
- Talk to your franchisor before searching for outside financing; get approved or pre-qualified.
- The most common source of start-up capital is friends and family. Use them.
- Seek out lenders that understand not just business but franchising as well.
- Be totally honest and upfront with lenders. Hide nothing. Be prepared to explain everything.
- Neatness counts. Fill out your credit and loan applications clearly. Typed is better.
- Don’t weigh down your loan application with attached documents.
- Don’t exhaust your liquidity by paying off outstanding debts before filing a loan application. Lenders want you to have capital available.
- If you lack liquidity, find a partner with money.
- Consider equipment leasing to conserve start-up capital and improve the appearance of your balance sheet.
- Keep debts and expenses to a minimum. Many business owners take on too much debt, forgetting that cash flow must pay that debt.