Many new franchisees will be in a position where they don’t have enough money to start the franchise operation they want, and need to get franchise finance for the balance. You may be wondering if you should go to the bank to get the money or if there’s a better method to use.
This is an important topic for just about anybody who wants to start a franchise business. It’s also a topic that’s frequently misunderstood.
You should have a good working knowledge of the likely parameters of financing that apply to you and also the best sources of information about available programmes.
Most people think that getting a loan to start a business is just a matter of talking to a bank. After all, isn’t that what banks do — loan money to people who need it?
Would-be entrepreneurs figure they’ll explain their reasons for wanting this particular business, outline the projections for how much money the business will make, and then the banker will loan the money based on those projections. The loan will be secured and then paid back from all the assets and profits of the new business.
Problem is, there is zero chance this scenario will work.
You Need Collateral
If you walk into any bank and tell them that you want a loan to start a new business, you won’t get any money unless you can completely collateralise the loan through your own personal assets. In other words, if you have cash, stocks, home equity and other semi-liquid assets that could easily repay the loan if the business defaults, the bank will probably lend you the money. On the other hand, if this is the situation, you don’t really need a business loan.
If you have sufficient personal collateral to secure a loan for the amount you need – especially if it is in your home equity – the easiest and cheapest way to get that loan is to establish a line of credit at the bank for the amount you need.
Don’t even discuss a business start-up with the banker. Whenever a banker hears that you’re going to start a new business, it raises multiple red flags and creates issues that will just slow you down and cost you more money.
Let’s assume you’re not financially strong enough to take this approach. You’re going to need help. The other options potentially available to you include government-sponsored programmes, non-banking loan sources and lease options. Each has many variations, but the common denominator is that they’ll be willing to take more risk, so your chances of getting money will be better.
To offset the increased risk, the money you get from these sources can be more expensive (in terms of fees or interest rates).
As a general rule of thumb, you’ll need to have your own cash available for at least 30% of the total investment required for the franchise business. You can also expect that any lending source will probably require personal guarantees that will effectively pledge all your assets to protect any loan.
Speak to the Franchisor
The best source of information about options that might be available to you is the franchisor you’re interested in joining. The franchisor should be familiar with the costs associated with each option and the likelihood of you being able to obtain financing from any particular source.
Many franchisors have already set up programmes with selected financial sources to facilitate rapid funding of their franchisees.
In this case, the franchisor should be able to walk you through the process with a minimum of hassle for you. The first thing you should do – once you’re fairly certain you’ve found the franchise that is right for you – is to request this information from the franchisor and start looking into your options.