Just a few years ago, franchise companies opened at all corners of the country not to mention around the world in emerging markets. One of the reasons was that it was quite easy to get funding for a franchise purchase and development.
But when the big recession struck, almost 90% of all franchise funding went off and many previous lenders and current banks still do not get their franchise lending.
Why? Only the lenders know.
On the other hand, the franchise industry has been one of the fastest growing industries even against this bad economy. Franchises are a very easy way to entrepreneurship. Franchises offer proven business models, established procedures, name recognition, economies of scale and shared marketing.
All important aspects of the companys longterm success and things that can take years or decades to develop on their own.
So, if the number of franchises grows and grows quite well, how do they get funding to do that?
First, lets start by understanding what it takes to buy and thereby finance a franchise.
Franchises are available in all shapes and sizes. You can buy a franchise right for as much as a $ 1,000 one that you probably would flow from your home to several million dollars one that would require a large building and lots of equipment.
Now, to fund these companies, most lenders will look at several things, where the most important is credit and cash flow.
Credit and cash flow:
Your credit does not matter it has always and always wants. So if your credit is not up to par start here to get it fixed. It does not matter if you try to borrow a thousand dollars or a million, without solid personal credit you have no chance period.
Regarding cash flow. Your franchisor should be able to provide average revenue that each franchise should earn annually. Lenders will then evaluate these numbers and try to determine if you the borrower have experience in meeting these meanings.
Most lenders require an advance payment for a franchise purchase. It is essentially a way to share the pain and the risk. This payment can range from 10% of the purchase price to 30% or more, with an average of about 20% to 25%.
This means you have to come to the table with some money and prove that you have these funds and where they came from no lender will lend to you, say 80% of the amount needed and know that you have already borrowed it other 20% just too easy for the borrower to go away without any proper skin in the game.
Given the current economy and the lending permit to small businesses especially unlisted franchisees the franchise system is proven, the new owner is not in the creditors eyes Security requirements are climbing. Thus, which use to take only 30% or 40% in the security value to get a franchise loan could now take 50% or more.
This means that when you apply for a franchise loan, you are willing to either outsource the equipment and equipment, your franchise will buy with the loan financing or be willing to provide additional collateral such as your personal home or other personal assets.
SBA loves franchises. Not only are these usually proven business models, they come with a great support and mentoring system things that the SBA considers important for business success.
But more than that, the SBA offers many funding programs for all types of franchises. Some programs are more focused on franchises that require a lot of property and equipment, some programs are designed for laborintensive franchises. Some programs are designed for export and international trading companies franchises and some are intended for veterans. In addition, the SBA offers workforce financing programs that usually tend to be some of the most difficult business loans to acquire given that most new companies do not have many financial assets to repay the loan.
Community Development loans
Also in conjunction with SBAs 504 business loan programs, social development loans are major funding vehicles for franchises that need to finance commercial property and equipment items that can be set.
These programs can also reduce the size of an advance payment that a franchisee needs.
Example: Lets say your new franchise has to buy $ 500,000 of property and equipment. For a traditional corporate loan and even some SBA loan programs, you have to pay a payment of approximately $ 100,000 which is quite heavy.
But with social development loans, that amount can be halved.