Franchise Financing

Determine Your Net Worth

Before you approach any lender, you’ve got to determine your net worth. Use a software spread sheet program or ledger and list all your assets: cash on hand, checking and savings accounts, current market value of your home, real estate holdings, automobiles owned, leased or financed; bonds, securities, and cash values of insurance plans.

List all current liabilities you expect to liquidate within a year, such as credit card accounts, car loans, miscellaneous secured and unsecured loans and taxes. List long-term liabilities, those you don’t expect to liquidate within a year, such as your home mortgage, home equity loans, finance company loans and long-term leases.

Subtract liabilities from assets.

Check Your Credit

This step should be started as far in advance as possible, since any errors that may have appeared in your credit records will need to be addressed and corrected. This process of Repair 101: Disputing Errors can take six months or loner to complete. If you are fortunate to not have any blemishes on your credit record, consider yourself lucky and begin shopping for commercial financing.

Franchise Financing Business Plan

Writing A Business Plan will make you think about where you’ve been and where you’re going. What a lender will be looking for before agreeing to franchise financing is a detailed study of the type of franchise you plan to buy, income and expense projections, cost analyses, estimates of working capital, your "people skills" ability to manage people, industry-related experience and a marketing plan, including advertising and promotions. Include certified statements of your net worth and credit references.

Look For A Local Banker

Banks are a very conservative lot and unwilling to provide start-up funding. But since you plan to buy a franchise, bankers may be more willing to take a look at your figures and planning. Lenders will be looking for stability--how long you’ve been at your job, lived in your home and a good credit account payment records. In short, a responsible individual who is competent to pay his bills may be a good candidate to run a business, depending upon what the type of franchise you’re looking to purchase. Another factor is how well you budget your money. In general, the ability to live within a budget has nothing to do with the amounts of money you earn. Some folks can function very well on less, while others are unable to make ends meet earning $100,000. If you’ve failed live within a budget, lenders will wonder about your ability to manage business finances.

Lenders will also look at your credit report’s track record in paying off past obligations. Anything not paid in full on time is a red flag. If you have these, be prepared to offer explanations as to why you failed to repay under your contracted obligations. Once they have taken a good look at your record, lenders will compute your credit scores.

Financing Options From The Franchisor

Most franchisors usually only provide debt financing, while some finance a portion of start-up costs, expecting the franchise to obtain the part that’s lacking. Franchisor loans have different structures. One can offer simple interest, no principal, and a balloon payment due in two, five or 10 years. Others require no payments due until after the first year. Some franchisors finance equipment only or combinations of equipment, franchise fees or operational costs. Leasing is an option usually offered by the franchisor who has a financial arrangement with a leasing company.

Most franchisors will help you secure a loan, assisst writing a business plans, referrals to lending sources specializing in funding franchises, and act as loan guarantors, since they have a financial interest best served when you succeed.

Alternative Franchise Financing Options

Some companies specialize in equipment leasing for franchises, providing asset-based lending for furniture, equipment, signs and fixtures, with an option to purchase at the end of the lease. Like traditional bankers, the rates you’re offered will depend upon a good credit record.

Other Sources/Risks Of Financing

• SBA loan programs can guarantee up to 90% of a loan to a bank
• Friends and relatives: high risks of destroying relations should you fail to repay
• Second home mortgages: risk of losing your home
• Home Equity loans: risk of losing your home
• Finance companies: generally high interest and short term
• Cash Reserves - Limit investing to no more than 75%
• Retirement accounts: Highest personal risk should you lose it