Financing Your Franchise

     While many franchises have become global institutions, those widely recognized brands with more than 500 stores make up only nine percent of the entire sector. Most have fewer than 100 stores.

     As with any business venture, two of the first questions a prospective franchisee asks is "How much will I need?" and "Where will I get the money?"
Obviously, the ante will vary from company to company, but a recent study found that the average initial investment levels for nearly eight out of ten franchises, excluding real estate, are less than $250,000.

     "Entrepreneurs looking for financial backing to buy a franchise can count on two things: lenders want to see strong business plans, and they expect borrowers to provide about a third of the total capital needed," notes International Franchise Association Pres. Don DeBolt, head of the world’s oldest and largest trade group representing this growing business strategy’s leading franchisors, franchisee and suppliers. "Depending on the type of franchise, this could mean coming up with roughly $50,000 to $200,000 from savings, stocks, bonds, pensions, IRA, property or funds from other family members." Tomorrow’s franchisee has a wide variety of places to seek the other two-thirds of the bucks required to purchase that franchise. Here’s where a majority of franchising financing originates.

     Commercial Bank Loans and Independent Financing Specialists Franchisee generally have an easier time securing bank loans than their independent-business owner counterparts, because they have the backing of an established trademark and marketplace experience of their franchisor. Banks generally point to lower default rates on franchise loans. In addition, several lending institutions specialize in franchise loans, catering almost exclusively to franchising, which is experiencing a 10-12 percent growth rate each year. Lenders who specialize in franchise financing are listed on the International Franchise Association’s website at www.franchise.org. Look for the Supplier Business District, then go to the Financial Services category.

U.S. Small Business Administration

     The U.S. Small Business Administration (SBA) offers competitive rates and generally longer terms than other sources. Loans are typically made by a private bank or other lending institution, with a portion guaranteed by SBA. The agency offers many programs designed to meet a variety of small-business needs, including its popular 7(a) guaranteed business loan program. The low documentation loan program, introduced in 1994 to secure loans of $100,000 or less, is now the fastest growing SBA loan program. The Certified Development Company is a private non-profit organization licensed by SBA as a lending source for small and medium-sized businesses that need financing for industrial or commercial buildings, machinery and equipment.

     Small Business Investment Companies (SBICs) provide equity capital and long-term debt financing, specializing in particular industries. Local SBA offices, franchisors or banks can help with this financing vehicle.

Many franchises are listed in the agency’s Franchise Registry, which streamlines the loan application process.

Direct Financing from Franchisor

     Many franchise companies either offer financial assistance themselves or help franchisees find a bank or other lender. Most have lists of bank and non-bank lenders with which the company has good relations, called preferred lenders. Less common are direct financing programs, loan guarantees or leasing programs for property, equipment and working capital, but it pays to inquire, because some franchisors do offer the option.