Funding Your Dream

The number one reason for new business failure is poor management.  A close second is inadequate or ill-timed financing.  Money is the fuel that drives your business engine.  How do you determine how much money you'll need to fuel your business dream?

This is another area that franchises benefit the new business owner.  The franchisor is required to disclose in Item 7 of their UFOC the details of your initial investment.  With a history of new franchise openings and knowledge of how the business typically operates during its initial period, mature franchisors can estimate not only the cost of establishing the business, but also the working capital you’ll need.  Keep in mind that if you plan on starting your business in a region with higher than average costs (e.g., minimum wage, lease rates, utilities, etc.), your initial investment may be higher.

Even before beginning your search for a franchise you probably had a good idea of how much you were able to invest in a new business.  Those "liquid assets" may have come from bank accounts, home equity, saleable assets, and taxable stocks, bonds and mutual funds.  Don't forget to talk to family and friends.  Not just to ask if they are interested in investing in your new business, but to also ask for their help and advice.

One more thing before you stick your hand out, speak with your franchisor about any internal programs that assist their franchisees in getting into business.  Programs like equipment leasing programs, building and / or land leasing programs, financing programs, initial inventory fills, and deferrals of part or all of the initial franchise fees due to the franchisor.

In addition, many established franchises have resources and relationships established that can be a source of funding.  In addition, these lending sources typically know and understand the particular franchise concept and therefore can expedite or streamline the lending process.  A small fraction of franchisors provide loans directly, others act as guarantors.  Not all of these programs are available at every franchisor, but it’s worth asking about.

You

You've known people who've been successful at whatever they've put their mind to.  You've also known people who can take a good thing and turn it into a nightmare.  Lenders recognize this.  One of the most important factors lenders look at is the strength and experience of the management team.  That's you.  Lenders are primarily lending to YOU.  You must exhibit the energy, insight, passion and a history of getting results and past success to convince them that YOU will be successful and that they'll get their money and interest back.

Business Plan

Business plan development, content, style and format is whole world of its own.  There is an entire industry of software, consultants, non-profit organizations and web sites dedicated to helping you create a business plan.  My advice is start with the franchisor.  Many will have a template including financial exhibits that have proven to be successful with lenders in the past.  At a minimum, have the franchisor provide you with industry facts and marketing insights that you can use in your business plan.

Be sure to expand as much as possible on your marketing and business development strategies.  Include the franchise's marketing collateral as evidence of their strength of establishing successful outlets.

Get as much help in developing your business plan as possible.  Ask your accountant and financial planner for help.  Another source of advice on developing business plans and getting started in business are the folks at SCORE (www.score.org). The Service Corps of Retired Executives is a nationally based, nonprofit association with 10,500 volunteer members and 389 chapters throughout the United States and its territories. Besides providing business advice for free, the volunteers at SCORE have years of experience in helping businesspeople and consequently do a terrific job.  Another great resource are your local Small Business Development Centers (SBDC).  They're often associated with local community colleges. Go to http://www.sba.gov/sbdc/sbdcnear.html to find a local SBDC chapter.  They have counselors and workshops dedicated to helping local small businesses be successful.

In preparing to go in-front of a lender, consider having a notebook or binder tabbed with the follow:

1. Executive Summary

2. Business Plan

3. Resume / Net Worth Statement / Bank Statements

4. P&L for potential business / List of debt free equipment "assets"

5. Territory / Franchise Information

6. Tax Returns Business

7. Tax Returns Personal

8. UFOC

9. Legal Documents / LLC Papers

Banks

Let me start with the bad news.  There are so many potential lending customers in the market today that banks have the luxury of being very very conservative in their commercial lending.  In other words, be prepared to hear "No" a lot.  Now the good news, because you've chosen to go with a franchise, you should have easier access to funding versus someone starting their own business.

Start with any local banker that you've got a relationship with.  If they can’t be helpful to you directly, they’re likely to know other banks in your community that can be of assistance.  Look for banks experienced in lending to small businesses. Contact your local business journal for a list of the most active small business or SBA lenders in your local area.

Small Business Administration (SBA)

You're likely to hear a lot about the SBA during this process.  They are not a direct source of money, but rather a source of loan guarantees from the federal government.  While the SBA has come under a great deal of criticism and change as of late, they're remain a great source of help.  You can find them at www.sba.gov.

The SBA provides a number of different loans programs.  The 7(a) program addresses specific needs of start-up or established businesses.  Low documentation loans are popular with a simple, one-page SBA application and rapid turnaround on approvals for loans up to $150,000.  The SBA Express program is for loans up to $350,000 with up to a 50% guarantee.  The 504 program is for real estate; but not investment property.  It asks for only 10% equity where conventional lending would ask for 20-25% equity.  The 7(m) program is the microloan of $500 to $35,000.  The 8(a) program or minority business development is intended for business development purposes to help socially and economically disadvantaged business owners.

For any or all of these SBA programs, read more about them at the SBA web site and speak with your lender for more information.

A relatively new program established by the SBA is the Franchise Registry at www.franchiseregistry.com.  The Web site lists over 700 franchise systems that have submitted their franchise documents to the SBA for review and approval. By pre-clearing their documents, the franchisor enables prospective franchisees to get expedited loan approval from the SBA.

Retirement Funds Usage

Tax laws prohibits or severely penalizes you for dipping into your 401(k), IRA, profit sharing or annuity plans directly to fund your new franchise business.  Now there are companies that provide (for a healthy fee) service to release the money in your retirement funds and use it to start your business.  For many people with an entrepreneurial dream, this is their only option and source of equity for their business.  Contact us at Franchise North America for recommended companies and contact information.

Other Sources

Other sources for leasing programs and sources of funding can be found through the International Franchise Association’s Council of Franchise Suppliers at www.franchise.org.

There are a number of investment or financing companies that specialize in certain franchise industries (e.g., automotive, restaurants, chain retail and multi-unit operations).  Contact us at Franchise North America for recommended companies and contact information.

Plan to have a cushion of debt-free funds should your business not take off as you expected, in which case you’ll need additional money for the business or to live on.