Financing Your Franchise Purchase

What better time than March, when many of us celebrate our Irish heritage with green beer and green shamrocks, to talk about that other important “green” subject: money. If you are interested in purchasing a franchise, but that pot of gold at the end of the rainbow has eluded you, don’t worry. There are a number of ways you can finance this purchase.

Liquid capital refers to money you have in a checking or savings account or stuffed in the back of your lingerie drawer. It’s readily available. Semi-liquid assets are things like stocks you can sell or a home equity loan that you can get your hands on with a little work and a short wait. Either form of cash works well for a Franchise purchase, provided you are not tying up all of your capital and still have money set aside for emergencies. If you have the cash, you can self-finance your purchase and save money in interest payments. But even if you choose to, or need to finance your franchise, liquid capital is almost always required for at least part of any purchase.

Another way to finance your business is to take out a bank loan for part of the cost. To qualify for a bank loan, you will need sufficient personal collateral to secure the loan, usually in the form of home equity. Many franchisors have relationships with lending institutions and will assist their franchisees in obtaining these loans.

Also, there are some franchise companies who will loan money to their franchisees for a franchise purchase, often at a low interest rate. In this case the franchisor is giving you a “double seal of approval,” once as a franchisee and again as a borrower!

A popular trend for financing a new business is to take out a loan from a retirement account. If you have an IRA, 401K or other retirement account, you may be able to use that money to invest in a franchise. Essentially you are loaning that money to yourself and saving the interest you would pay to borrow money from an outside party. If your business becomes profitable, your retirement account will also increase. A financial advisor is needed to set this up so you can do this without taking a taxable distribution or incurring penalties.

There are a number of companies who now specialize in this type of financing, such as Guidant Financial Group, BeneTrends and Gillis Pension Consultants. Check with a specialist in retirement fund financing to see if this is an option for you.

The United States Government is also a resource when looking for money to fund a business. The Small Business Administration (SBA) has programs available to help you with your franchise purchase. While the SBA does not loan you the money, they will be a guarantor of loans made by private and other institutions. This type of loan is popular with first-time franchisees who do not have a track record of running a business. You can check out the SBA at http://www.sba.gov/financing/sbaloan/snapshot.html.

The SBA also recommends you check out The Office of Women's business ownership and the Online Women's Business Center . The Women’s Business Centers are, “designed to assist women to achieve their dreams and improve their communities by helping them start and run successful businesses, regardless of social or financial disadvantage, race, ethnicity or business background.” You may also find financing through one of these centers. The center in St. Paul, Minnesota, called WomenVenture, is a microlender that provides financing to qualified new and existing businesses. Loans range from $500 to $50,000, and they also partner with a variety of lending institutions on larger projects. You can find your local Women’s Business Center here: http://www.sba.gov/idc/groups/public/documents/sba_homepage/wbc.pdf.

A solid business plan and great credit history are important for anyone securing any type of loan, say the experts. Lenders will scrutinize your credit history to determine if you have experience borrowing money and making payments on time. To be approved for a loan, the franchisor you intend to join should have a strong model, a proven concept and a history of success. You will also have to pay for part of the purchase in cash, showing that you have some “skin in the game,” and will be willing to work hard to protect your personal investment.

If you have friends or relatives with money, you may be able to borrow from them, particularly if they have confidence in your entrepreneurial abilities. Private loans are often provided at low interest rates which can be helpful when you are getting started. You may also want to consider having a partner in your new business, both to help you finance the business and to help you run it. Partnerships can be particularly helpful when the partner has strengths in areas where you are inexperienced.

Venture capital is another way you may find financing for your business. Venture capital is provided by an outside group of investors willing to be involved in a high-risk venture with the potential for higher returns and/or a percentage of ownership in the company. However, a venture capitalist’s focus is generally a start-up or struggling business with exceptionally high growth potential, which is not your typical one-unit franchise.

In between the small amount of money you may be able to borrow from family and friends and the large amount of money venture capitalists will loan you, there is another source of financing: the angel investor. An angel investor is a wealthy individual who will provide capital for a business start-up, usually requiring ownership equity in exchange. Because they fund high-risk ventures, they require a high return on their investment.

Credit cards have not been the best source of financing for potential franchisees because of the high interest rates and low credit limits. It usually takes many months before a new business begins to make money and making those high-interest payments can be difficult. Generally it is better to save the credit cards for emergencies and find a better source of financing for your business.

The expression that it takes money to make money is as true in Franchising as in any other type of business. It will be easier to borrow the money to start your new business if you already have a tidy pile of cash tucked away. Along with this “seed” money, you will also need a great credit record and a history of borrowing and repaying money.

With a little luck and some thorough investigation and planning, you should be able to find a source of franchise financing that suits you…and that’s no blarney!

Kim Ellis is president of Bison Advertising, Inc., a leading online resource for Franchises and business opportunities.  Drawing from a diverse background in franchising, marketing and operations, Kim specializes in Internet marketing, lead generation and branding.

Prior to Bison, Kim served as vice president of FranChoice, where she helped establish one of the industry’s most successful franchise referral networks. Her responsibilities included franchisor relations, brand management and lead generation. Prior to FranChoice, she served in executive positions for Regis Hair Salons, Premier Hair Salons International, and for a business-to-business marketing agency in Minneapolis. Her franchise experience started with a family-owned Schwinn Bike franchise and extended to her first position after college with Great Clips for hair.  Currently, Kim serves as chairperson for the International Franchise Association (IFA) Women’s Franchise Committee and as a member of the IFA Supplier Forum.