A Brief Q&A on Franchise Funding

E2 VisasQ: Why is a franchise easier to get funded than a new business?

A: Simply put, franchises are less risky than new businesses. Franchises tend to come with established brands that already have a proven model and several-to-thousands of success stories already on the books. For that reason alone, any bank that has a ‘franchise unit’ or ‘franchise underwriters’ will be far more likely to finance you if you come to the table with a solid franchise plan compared to someone claiming that they can create success without a proven roadmap and existing brand positioning. In fact, if you don’t have a solid franchise plan in hand, or you talk to a banker that isn’t part of a franchise-oriented department, the chances are very good that the bank will insist that you have 100% collateral available before they give you any financing at all — which means you would have the option of paying out-of-pocket and skipping financing altogether.

Q: If I can afford to pay for a franchise out-of-pocket, why would I pursue financing?

A: Two words: leverage, and security. One of the key concepts behind maximizing your long-term profitability is called leverage: being able to invest more money than you actually have into a venture. The idea being that the more you can invest up-front, the shorter the total time-to-profitability, and thus the greater the long-run profit. At the same time, the most common problem in running a franchise is failing to have enough money in reserve to make it to the break-even point — and financing allows you to keep a greater amount of cash in an emergency fund than paying for everything up-front.

Q: How much should I borrow?

A: Wrong question. Instead ask ‘How much do I have to borrow?’ In balance to the last question: the more you borrow, the greater the impact if your venture fails — and you must account for the chance that you will fail. The point of financing isn’t to overleverage; it’s to maximize your chances of success by being amply-funded while also not taking on so much risk that a failure will drive you into bankruptcy. This is where a rock-solid business plan based on highly-conservative financial projections comes into play; with those documents and an experienced accountant, you should be able to reverse-engineer a loan that optimizes your chance for making a modest living in the short-term, breaking even in a secure and reasonably swift manner, and collecting a (hopefully somewhat immodest) profit down the road.

Q: Are there options beyond a simple bank loan?

Of course! Even within the ‘traditional’ banking system, there are several levels of financing that you can access. Then of course there are the many non-bank sources of financing you can approach:

  • The Small Business Administration and other business-related (usually State) organizations insure small-business loans to franchise owners. Technically, the loan still comes from a bank, but with the SBA’s backing, you’ll be far more likely to obtain financing.
  • Some franchisors will offer financing through an in-house system. Compare options carefully, because some can seem like traps for the unwary, but most are fair.
  • Other non-bank lenders can be extremely challenging to properly assess. The best advice is to inquire at your local Small Business Development Center and double-check a non-bank lender in the Better Business Bureau before you delve into that realm.

Funding is obviously one of the major considerations you must evaluate when deciding whether or not to purchase a franchise. Other considerations include skills, passion and interests. Many franchise recruiters will try to persuade you to buy into their brand simply because you are financially qualified. However, this is not always the best advice. It is much better to speak with a franchise broker who has access to hundreds of national brands across a wide range of industries and can objectively analyze which Best franchise opportunity is right for you.

At Franchise City, our brokers use a unique and proven 20 step process to match clients with their ideal business opportunity. There is no fee for our service and the franchise fee is the same whether you go through a broker or the company recruiter. For further information about franchise funding and all other aspects of franchising, contact us by filling out the form below.

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