The Ultimate Guide to Financing Your Franchise: Tips and Insights
Starting a franchise can be an exciting and profitable venture, but securing financing is often one of the biggest hurdles. Whether you're eyeing a well-established brand or a new, emerging concept, understanding how to fund a franchise is crucial for your success. In this comprehensive guide, we'll walk you through essential insights and strategies for franchise financing, based on a recent video discussion by a seasoned franchise financing advisor.
Understanding Franchise Financing Options
Evaluating the Franchise Brand
Before diving into financing, it's important to assess the franchise brand you're interested in. Are you looking at a new, emerging franchise with just a few locations, or a well-established brand with hundreds of outlets? The type of franchise significantly impacts the lending options available to you. Banks and lenders often have different appetites for emerging versus established franchises. For emerging brands, lenders might be more conservative, offering smaller loan amounts and requiring stringent performance metrics before approval.
Navigating SBA Programs and Certification
The Small Business Administration (SBA) offers various programs to help franchisees secure financing. Although the SBA directory has been discontinued, the certification from FranData has become a critical tool. Many banks will consider loans for franchises certified by FranData, even if they aren't listed in the SBA directory. This certification can help overcome lending barriers, but it's important to understand the limits some banks might place on such loans.
Assessing the Borrower’s Financial Profile
Key Financial Considerations
Lenders evaluate borrowers based on their financial health, including credit scores, liquidity, and assets. A high credit score and robust financial background can significantly increase your chances of securing a loan. However, if your liquidity is lower than preferred, some lenders might still approve your loan by incorporating working capital into the financing structure. This flexibility is especially useful for new franchisees with limited liquid assets.
Finding the Right Lender
No single lender is right for everyone. The key to securing the best financing deal lies in finding a lender that matches your specific needs. Factors such as the type of franchise, your financial situation, and the overall business model play a crucial role. Working with a broker or advisor can help you navigate this complex landscape and identify the most suitable lenders for your situation.
Customizing Your Financing Solution
Loan Percentages and Conditions
Financing terms vary widely among lenders. While some might offer up to 80% of the total cost of the franchise, others might go as high as 90%. Understanding these terms and knowing how much equity you need to inject into the deal is vital. If you're faced with a decline from one lender due to liquidity issues or other factors, it’s worth exploring different lenders who might offer more favorable terms or structures.
Exploring Equity Injection and Partnership Options
You don’t always have to provide the entire equity injection from your own funds. Gifts from family members or investments from partners who own less than 20% of the business can also contribute to your equity. This flexibility allows you to manage your financial resources more effectively and still secure the necessary financing for your franchise.
Real Estate Financing and Additional Tips
Utilizing SBA 504 and 7A Loans
For those looking to invest in franchise real estate, combining SBA 504 loans for property acquisition with SBA 7A loans for franchise operations can be a powerful strategy. This approach allows you to finance real estate while also covering franchise fees and other operational costs. If you plan to occupy at least 51% of the real estate space, this can be an excellent way to leverage SBA loans effectively.
Creative Financing Solutions
Sometimes, creative solutions are needed to get the funding you need. For instance, using a rollover as business startup (ROBS) plan can be beneficial, but it’s essential to consult with a CPA to understand potential tax implications. Additionally, if you’re planning a multi-unit purchase, financing typically covers only the initial units built out in the first year, with additional fees paid out of pocket.
Conclusion
Securing franchise financing involves understanding the franchise brand, assessing your financial profile, and exploring various lending options. By working with knowledgeable advisors and leveraging available SBA programs and creative financing solutions, you can navigate the complexities of franchise funding and move forward with confidence. If you have more questions or need personalized advice, consider booking a consultation with a franchise financing expert to explore the best options for your specific situation.