Financing a Franchise

So you want to buy a franchise. If you have all of the capital needed to make the purchase with some leftover to run the business then you do not have a problem.

The potential owner with the desire to own a franchise, but is short of money is the person this article is directed too. They have the motivation, but they do not have the needed capital to pull off the purchase. There are several ways to solve this problem assuming the potential owner is of good character and has a solid credit rating.

Franchises have been known to assist in the financing as they are always looking for people who can run the business well, but are in need of some start up money. They have sources that they deal with all of the time and this helps as they have a track record of success with picking good owners. They also may have contacts with investor groups who have capital. These groups are looking for a good place to get back a better than average return.


Where can you find the money


A house with a substantial equity may be a good place to start. A new loan could be written at a decent rate of interest and the money is found. Family and friends are the next source. Your bank may be a source if you have had a successful track record with them. Some insurance policies have very large cash value that can be borrowed against. A portfolio of stocks and bonds may make perfect collateral for a substantial loan. If your net worth is substantial you may be able to get a signature loan even though you do not have any ready cash. You can guarantee the loan to either the bank or the SBA.

If none of these are available talk with the franchise people. They may have sources that you could never approach as you would never know about them. For them finding good potential owners is their biggest concern. If they start with good people, their program will help them become successful.


Credit worthy owners and good managers


These two attributes do not necessarily go together in the same person. Good credit may be an accident of birth or result from a frugal nature. Good managers are usually very people oriented and sensitive to what their people will respond to and how they can be motivated. As you can easily see, these two human circumstances are not always found in the same person. Franchise people know this so they will put the two together which will form the bases for a strong franchise. The money is there and the management is there.

This may be a real partnership or just an investment by the money person. The franchiser will probably put the deal together.


Loans to the owner


Loans to the owner are almost always made to the business with the owner’s guarantee. Seldom can the business borrow on its own without the co-signing of the owner. This gives the lender two sources of recovery of the money if the deal goes south. This is true for a bank loan and also for an SBA loan. The lender wants to make sure that they have the chance to recover 100% no matter what happens in the future.


Investor groups or individuals


There are private investors that are looking for better returns that will buy into a franchise that will have a good manager running it. They do not want any of the day-to-day responsibility of running the business. They are just looking for a better than average return on their money.

The franchiser usually has some of these people in his back pocket for a deal that he feels will do well as long as there is the money to back it at the start.

If you are short of money, talk with the franchise people about helping you find an investor to help you get started. This is a negotiated arrangement so there are no rules other than it has to work for both parties.


Using your home to finance the franchise


This is done all of the time to raise the necessary funds to buy the franchise. There is some danger though, as the owner could fail and have to sell the home to repay the debt. If it is a sound business deal then it will probably work out okay, but the owner should consider what would happen if the business failed.Losing a home and a business at the same time could be a devastating blow to the owner.

The positive aspects of this are the loan will probably have a very low rate of interest and can be paid back with ease when the business is up and running. The owner will also enjoy the freedom of no one looking over his shoulder on decisions he makes. Sometimes not having to answer to anyone is all it takes to get the business over the hump. Distractions like extra cooks in the kitchen can make a good deal hard to live with. Outside pressure can be such a distraction.


Money from life insurance policies


A loan on a life insurance policy does not have to be paid back at any certain rate or maybe not even at all. The loan would be deducted from any payment of a death benefit. This freedom of scheduled paybacks may make this kind of loan one of the best available if there is enough money in it to do the job. The best part of this loan is the lender cannot turn you down as you are really borrowing from yourself. Have your agent check it out for you and give you the details. It is a source that many people forget they have and overlook the possibility. Some times this along with family and other help is all that is needed to arrange for the needed money.


Conclusions


Once you have found the franchise of your dreams, the financing of the dream becomes a very real obstacle for some buyers. Ask for any advice and help the franchise people can provide. They face this problem on many deals each year, and they find solutions all of the time. Use them and their experience.

The Internet list many companies that make these kinds of loans for the purchase of franchises. This is a very special lending market and you need to deal with people who understand it and can provide answers quickly. These lenders know the franchise market and they have a very good handle on who will be successful and who is a high risk. As in most business deals it is always better to deal with experts in the area you need help with.

Private investors who have no interest in running the franchise are another way to get the needed funds. They will get an excellent return on their investment, but they deserve if as they are depending on you to make it work. A good manager and a good money person make powerful partners in a business. They each contribute from their strengths and together they have a better chance of success.