Franchise Financing – Will the Franchiser Provide Franchise Loans?
Before the financial crisis of 2008 and the full impact of this recession, financing a franchise was fairly easy to get done. Lenders were seeking franchise loans and the SBA was providing loan guarantees to the lenders.
Now franchise financing is very difficult to arrange through traditional lenders. One leading franchise company in 2009 saw fewer than 10% of the franchises it sold to were able to secure loans. This had a very negative impact on the franchise companies revenues. Today after implementing the strategies described here that same franchise company now has 75% of it’s new locations getting franchise financing.
Some franchise buyers can use loans from their 401K accounts and others are able to pay cash from savings or get raise money through outside investors. Even using Home Equity Loans has become difficult with the dramatic drop in home values the last few years.
The result of this has been a slowing of sales by the major franchisors. According to the Wall Street Journal in 2009 new franchise openings declined as much as 3.6%. In 2010 the new openings of franchises increased a minuscule 0.3%.
In response to this the franchise companies of taken several steps to improve franchise financing opportunities for their buyers. Several have a program where the franchise company itself will finance part or all of the franchise fee. Some do not promote this and will use it only as a last resort to make the sale. Others present it right up front when promoting the sale of their franchise. The best advice Your Business Mentor Ray has on this is to ask for an in house franchise loan and do not accept a no the first time you ask. Keep asking!
More commonly today the franchise companies have taken a proactive approach toward franchise financing. This is done by adding hiring banking experienced executives to work with potential franchisees on preparing their business plans and loan request packages. In addition, these executives will develop relationships with several of the national lenders to demonstrate to then the viability and value in their franchise offerings. In this way these lenders are prepared to make a decision on the buyer of the franchise without needing to spend so much time verifying the claims of the franchise company.
Another method used by some franchise companies is to set up a preferred third party to handle all their funding requests. Almost like an in-house finance arm that is similar to using financing at the dealer when buying a new car. This is especially popular with a franchisers existing unit operators. These proven franchise owners often want funds to add a new location or territory. The third party in-house financing a franchise method really has been successful in this type of situation.
As in types of franchise financing it is important to utilize the services of an experienced small business lawyer and small business accountant. Do not let the fact that franchise loans may be available to you – blind you to the basic business economics of the potential loan and also be sure to understand the answer to this question, ‘What does a franchise really cost?’.
Your business Mentor Ray, strongly recommends that you have a full understanding of the Franchise Disclosure Document (FDD) and have conducted extensive due diligence before buying a franchise.
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