Financing a Franchise


You’re finally ready to take the leap into beginning your franchise. The question is: Where will you come up with the money to finance it?

Before diving into contacting a lender, there are a few steps to take beforehand. First, you have to determine your net worth and credit rating.

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“Most lenders will first consider the four C’s of lending, which are capacity, collateral, credit and character,” says Don DeBolt, president of the International Franchise Association (IFA) in Washington, DC.

One way to help you establish your net worth is to create a personal balance sheet that outlines your assets (what you own, i.e. cash, savings, real estate, etc.) and your liabilities (what you owe, i.e., bills, auto loans, home mortgage, etc.). Essentially, lenders need to know the following information:

Income – How much money you make and how you live within your means will help lenders determine if you can manage business finances. Sometimes, it’s not always about the number itself. For example, if you make $30,000 a year, but budget well, vs. the person who makes $200,000 and is in debt, the person who makes less still is a better money manager.

Stability – Things like how long you’ve been at your job or lived in your home are important, too. These things show whether you tend to finish what you start. This is true for finances as well; knowing how well you manage your profits sets a good base point for lenders in knowing how well you’ll manage business expenses.

Track record – Lenders will determine how successful you’ve been at paying off past finances. If your track record shows late payments, delinquencies and so on, it’s a good idea to get this checked out before approaching a lender. Contact a credit bureau, which will allow you to see information about your credit history. This is what most lenders will do before allotting you to borrow.

Once that’s all squared away, you’ll need to assemble a business plan. Inside, you should include a detailed description of your business, cost analyses, working capital estimates, a marketing plan, as well as credit references and certified proof of your net worth. If you’re not sure how to devise a business plan, contact a professional business plan writing company or look into business plan preparation software such as Business Plan Pro or BizPlan Builder Interactive. Having a professionally acquired business plan will help in obtaining the funds you need for your franchise.

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Many times, franchisees will rely on the franchisor for financing. Some franchisors may offer loans with a balloon payment due years thereafter, and others offer loans that don’t require a payment until after the first year. Sometimes, franchisors don’t finance the entire cost, but only a fraction for things including but not limited to equipment, the franchise fee, operational costs or a combination of all.

“We look at franchisees as a separate market with a distinct set of needs,” says Bob Neagle, senior vice president of marketing and business development at AT&T Capital Corp in Morristown, NJ. “We find franchisees desirable as recipients of loans, because the franchise market continues to grow. And not only do franchisees need start-up assistance, they will continue to need assistance as they grow.”

Businesses become franchised because they’re expanding or building capital — that, combined with a good credit track record, and most franchisors will make a supreme effort to work with you.

 If you need more financing than the extent of what’s available from the franchisor, other sources of capital include home mortgages, veterans’ loans, financial institution loans, SBA loans, finance companies, as well as friends and family (the latter is actually the most common starting point for capital). There is also the option of taking out a home-equity line of credit or second home mortgage. Last, assets such as stocks, bonds and mutual funds are another option to secure a loan.

Call us or stop by today to find out how we can help you finance your franchise.

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