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Franchise Prospector » Money & Financing
Financing for a Franchise Business
How to Get a Small Business Financing for a Franchise Business
"SBA non-bank lenders are much more likely to look harder and deeper because all they do is make loans," said Penn Ritter, Executive Vice President of Business Lenders, a leading non-bank SBA lender. "They're more likely to be interested in the individual borrower and the franchise, taking into account professional goals and character, training and hiring practices, positive trends in recent credit history, and the current and future health of the franchisor."
In her book Franchising 101 Ann Dugan outlines four important areas to address that will facilitate the lending process: people, purpose, payment and protection. The first category, people, refers to your personal track record, professional integrity and credit history. Purpose deals with the concept of your franchise and how it conforms to your business plan. Lenders need a verifiable gauge of whether your primary source of repayment is sufficient for repaying the loan and if your cash flow assumptions are reasonable. Lenders will analyze whether your chosen market will sustain the need for the products or services your business offers. Lenders need assurance, or protection, that in the event your business fails and your primary income source is not adequate for fulfilling the terms of your loan that your secondary income source will meet the loan obligation. "You're not betting the farm if your business doesn't work out if you have an outside income, like a spouse working," Rick Anderson said.
Conventional Loan or an SBA Guaranteed Loan?
Deciding to pursue a conventional loan or an SBA guaranteed loan is a logical next step after compiling your balance sheets and assembling your business plan. Once you know where you stand with your personal finances and how much you need to borrow for your business, speak to an advisor or conduct an online internet search on the different types of loan options to choose the right one for your situation.
"Conventional loans are geared toward the stronger applicant who doesn't need to borrow working capital and has plenty of cash," Anderson said. "Conventional loans generally require 20 percent hard assets plus enough working capital. Applicants should have better than average credit as well." Some downsides to conventional loans are that the interest rates can be higher and repayments terms average 7-8 years, much shorter than SBA loans. The upside, according to Anderson, is that you are not gambling your home, plus approval can come in as little as week, while SBA loans can take a month to get approved.
If drawing up your balance sheets, running your credit and searching high and low for hard assets has landed you shy of the criteria outlined in this article, there still may be pursuable options. Investor Resource Network (IRA) are creative funding specialists who assist applicants find funding who have been turned down or who feel they do not qualify. An IRA consultant can pre-qualify you in as little as 5 minutes. The internet offers a plethora of information for starry-eyed borrowers. Do a keyword search using terms like "non traditional lenders" and "creative funding" to get an idea of what's out there. Check with franchisors to uncover special programs for motivated would-be franchisees. One such program is Firehouse Subs' American Dream Program, which provides store managers an opportunity to buy a share of their store's revenue and then after three years may qualify to buy their own franchise store financed up to $150,000 by Firehouse Subs. "As a working person with no access to capital," said Don Baird, who started out as a manager of a company-owned store in Jacksonville, Fla. and later became an owner of two stores in Little Rock, "there would have been little or no hope of owning my stores without something like American Dream." So, before abandoning your dreams, check out all the possible avenues, as one might lead you to owning your own franchise.
"Long-term growth often depends on initial debt," Penn Ritter said. "Almost every business has to borrow to grow." With scores of businesses popping up on nearly every corner, and companies expanding and growing, start up and growth loans are big business. With that in mind, whether you seek conventional, SBA or non traditional, there are countless advisors and lenders available to help you find what is right for you.
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