Funding a Franchise: Step-by-Step
Whether you’re a first-time franchisee or a seasoned multi-unit owner, there are a variety of places to turn to when you’re ready to grow
The franchise business climate has been steadily improving over the past several years. In fact, the International Franchise Association reported earlier this year in its Franchise Business Outlook that the number of franchise establishments in the United States is expected to increase by 1.7 percent, slightly ahead of the growth seen in 2013. Both new and existing franchisees will be turning to lenders for assistance with their expansion, so it’s important to have a plan when it’s your turn to grow.
Whether you’re new to franchising or gearing up to expand, the first major hurdle is acquiring the capital needed to get your concept off the ground. But where do you begin? Outlined below are some initial first steps and suggestions to guide you through the process of funding your franchise.
Talk With an Expert
Before you do anything else, it’s important to talk with someone who knows the options available to you. Your first inclination may be to have this discussion with your accountant or lawyer, but often, they do not have a full understanding of the complexities involved with completing applications for the various types of funding.
Benetrends has assisted more than 10,000 entrepreneurs over the past 30 years and is staffed by a team that specializes in 401(k) and IRA funding, SBA loans, securities backed loans and more. No matter who you choose to help with this process, be sure to request an initial consultation where you, and the specialist, will have the opportunity to ask all the right questions to make the most educated decision possible.
Look Beyond Your Local Banks
Many entrepreneurs make the mistake of considering only their two or three local banks. Depending on each bank’s current lending criteria, they may not have an interest in your application. If you do choose to go to a bank, be prepared to pitch your business plan to several banks. The first, second and even third may not have an appetite for your needs.
Consider a Government Program
The U.S. Small Business Administration has a number of financial programs for small businesses.
The 7(a) Loan Program, for example, is most commonly used to purchase a business or expand an existing one. Loan amounts range between $100,000 to $5 million and the SBA provides the lender with an 85 percent guarantee for loans up to $150,000 and a 75 percent guarantee for loans greater than $150,000.
With SBA’s 504 Loan Program, primarily used when real estate is involved, the borrower is expected to come up with 10 percent and the bank takes a first mortgage of 50 percent. The remaining 40 percent is raised by sale of debentures that provide the borrower with a 20-year fixed rate. Most 504 projects range from $200,000 to more than $5 million.
Check with Your Franchisor
Franchisors often have incentives for franchisees to promote growth in target markets. Togo’s, a West Coast sandwich chain with more than 325 locations open and under development, launched a multi-unit franchise development incentive program last year. Both new and existing franchisees who sign a new agreement for three or more locations receive reduced royalty fees for the first two years for each new restaurant that is developed in Arizona, Colorado, Idaho, Nevada, Oregon, Utah and Washington. Additionally, franchisees benefit from $10 million for remodels and transfers, as well as $5 million to build new restaurants.
Baskin-Robbins, with 7,300 retail shops in nearly 50 counties, is offering military veterans special incentives that include waiving the franchise fee for the first restaurant, reduced royalties and a 20-percent discount on the franchise fee for multi-unit agreements. New franchisees (non-military) can take advantage of 50 percent off the franchise fee, as well as reduced royalties for the first five years.
Franchisors also partner with lenders to offer franchisees the capital needed to expand. Benetrends recently announced a $100 million financing program to help IFA franchisor members provide qualified candidates with direct access to capital for new store development. Hand & Stone, a rapidly growing spa franchise, was the first franchisor selected to participate in the new program and received $10 million to assist with its franchise growth.
Look to Your Inner Circle
Friends and family, though sometimes considered a last resort, can also serve as a source of funding. They often know you best and understand your passion for your business idea, which allows them to more easily support it with capital. As with any lender, there should be a repayment plan. It is a business transaction, after all. Be clear about the terms, including the amount to be repaid, any interest rates and the repayment period.
Your Financial Needs
During your initial consultation with a potential funding source, come prepared with responses to some of these common questions that will provide an accurate picture of your financial needs:
- What is your net worth?
- How much do you have in cash?
- What is your credit score?
- What are your start-up costs?
- What is the time frame?
- What is the type of business?
- What type of funding are you looking for?
Finally, be prepared to present a complete loan package, which may include the following: a business plan, financial statements, copies of personal tax returns, credit score and more.
Rocco Fiorentino, CFE, is president and CEO of Bentrends, Inc., an authority in franchise and small-business funding. He is also a member of the IFA board of directors. Find him at fransocial.franchise.org.