Funding for Your Franchisees
Ways and Means to Grow Your Franchise System to the Needed Critical Mass
By Craig Francis
Franchise Funding Specialist
You have now become worthy of the name "Franchisor." Many people who are part of your franchise development process have seen your model as a classic example of the next business ready to explode into the franchise arena. Name any mainstream franchise and you will find a franchise business that started small and grew locally with SBA (Small Business Administration) funding.
Over the past 26 years I have reviewed hundreds of loan applications for franchised businesses. I funded and brokered many of them and many of these successful franchisees came back time and time again for more loans over the years. They built successful businesses and prospered beyond their wildest dreams. They became models of success for the franchisor and worked hard to achieve personal, professional and financial success. Their rewards were frequently the wealth that allowed them to retire rich while all along branding the franchise system. Successful franchisees, after all, isn’t this the goal of why you are franchising?
There are many forms of financing available to your future franchisees. Some are simple such as personal cash and others require more involved loan applications, business plans and loan requests. The single most popular loan model involves using government guaranteed bank finance. SBA is the loan format most frequently used by franchisees and can help you, the franchisor, attain the sales and location goals needed to bring your franchisees to the table.
For the last 50 plus years, businesses have relied on SBA loans, both direct from the government and for the last 27 years, from local and regional banks. Over $25,000,000,000 in loans to 100,000 businesses in 2006; this was a record for SBA financing. Franchisees racked up many of these loans as these entrepreneurs came into the business arena by the thousands.
Franchises are considered the ‘gold standard’ of SBA financing since their success rate is often twice that of the ‘mom and pop’ businesses. But SBA does have its down sides and can be a bit more complex than other loans. Of course, the simplest financing (but not always an option), is the franchisee’s own cash, where the franchised business can be grown to a considerable level without going to the "lending well."
If you plan to have successful franchisees then your franchisees must have enough capital for your venture. SBA-guaranteed loans are one of the most ideal ways to acquire large amounts of capital at reasonable rates and terms. Whether your franchise opportunity is smaller and requires less outlay funds, such as personal service, home-based, mobile or your business is more of a traditional store front model, there is a pretty good chance that your franchisee will not have the reserves for the initial estimated investment. THAT IS WHERE THE SBA COMES IN. The SBA loan can be used for the following:
- Working capital
- Equipment
- Furniture and fixtures
- Marketing
- Labor and material
- Miscellaneous hard and soft assets
Most new franchisees require a combination of these assets to start and run your franchise business profitably. The lender getting the SBA loan will work with your franchisee to compile a loan application from scratch. Or, your franchisee can come to me to compile their own online loan package and submit it to multiple lenders. The process of applying is not complex, but each franchisee must do their homework. The comprehensive business plan for your franchise will have many of the same features as the Franchise Disclosure Document. The loan request ‘wish list’ outlines the needed capital. Your franchisees contribution should be 20-25% of the entire loan request. Cash or retirement funds are the only real tangible cash assets your franchisee can use.
Consider your franchisees cash as "skin in the game." The lender will require that your franchisee contribute funds for their start-up franchise. Your franchisee can borrow multiple times from an SBA lender since their growth rate and range of locations is not entirely predictable. A single SBA loan may be all your franchisee may need, but it is always good to plan for multiples as your franchisee grows.
Most lenders on a local, regional or national level are what are called "preferred lenders." They can get automatic approval from SBA. The more compelling a loan application and funding request is, the more likely your franchisee will get approved the first time. DO NOT be afraid of having your franchisee potentially send out applications to more than one source, as no one is able to predict accurately which lender will approve them.
Franchisees may get their first round of SBA funding from a small micro-bank situated locally. Nonetheless, they may get more than one loan with this bank and yet find they may outgrow the lender in a short time period. It takes regional or national lenders who can service your franchisees and be able bring your franchise system to multi-state levels. In my experience, these national or regional lenders may be the perfect source of loans to help your franchisees attain the capital to buy into an area developer or acquire additional locations.
Most businesses never grow beyond a single location since the owner has not fully thought out the process of creating a systemized manual of operation that can be taken to the marketplace of proto entrepreneurs hungry to start their own business. The process of systemization makes the start up of your franchise business easy to assimilate by the buyer of the franchise. Franchising has a tried and proven history. You may not think your ideas and protocols are transferable, this thought is not shared by the millions of franchisees and the thousands of franchisors who have made their dream a reality. Your "brain trust," the group experts, including The Franchise Maker, are going to be able to help you through the minutia and systemization of your business. This expertise can reduce your fear factor of franchising to manageable levels.
New franchisees going in undercapitalized can be a fatal error and as a client of The Franchise Maker you inherit my experience, I will get you past your concerns about financing for your future franchisees. There are, in every town and city, dozens of highly trained people who can help your franchisees with loan plans and business models. They are waiting for you (as a franchise system) to take action and have one thing in mind…your success. With the right assistance, your franchisee can go from start to loan funding in as little as 60 days. Remember, as a franchisor, you control how your vision is realized and there are literally thousands of people who want to be part of the process of your success. Together we will help you get there.
ABOUT THE AUTHOR
Craig Francis is part of the franchise funding team for The Franchise Maker. He has spent a stellar career in corporate banking and since 1992 has specialized in SBA franchise lending. Licensed by the California Department of Real Estate, Craig provides loan packaging and services to start up franchise business owners (your future franchisees) using the SBA financing guaranty system. Craig has funded hundreds of loans by being able to match up start up franchisees with the perfect loan package and the right lending institution thus accelerating the entire process.
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