Financing A Franchise

Creative Franchise Financing in Credit Challenging Times

We can all agree in that in 2009 the landscape has changed in the credit world. Today the typical business loan requires more ingredients for approval such as: more capital from the franchisee, more collateral committed from the franchisee, a higher credit score for approval, and more steps to complete a business loan application.

In the midst of tough economic conditions, business start-ups are obtaining financing in a variety of creative ways. Aside from obvious sources of financing, such as accessing a personal savings account, entrepreneurs are using unique funding sources to achieve the dream of owning their very own business. Here are just a few:

1. Love Money - The Number 1 source of funding used (outside of one’s own personal savings) is that of friends and family. In these situations, the team at FranchisesForSale.com always recommends that the franchise owner document the loan, agree on re-payment terms with a reasonable interest rate, and set the clear expectations up front about risk in event that the business growth does not go as planned.

2. 401k – Many franchise owners have used their 401k to finance businesses. They believe that their money can be better managed by themselves, the business owner, than by money managers in distant cities like…New York. With one of many financial experts in the market, the process of utilizing a 401k as business funding can be done easily in less than 90 days.

3. Leasing – When considering the total start up budget of a new business, look at what items can be leased instead of purchased. If the total capital expenditure needed to begin the business is reduced then one will significantly increase the available monthly operating budget instead of using that money to satisfy a bank note.

4. Landlords – The recession has also impacted commercial landlords. Commercial office or retail space is in great supply and in low demand. Landlords can typically offer about one year’s rent upfront in cash to a tenant in exchange for signing a long term lease. The longer the lease, the stronger the brand and guaranty, the larger the up-front cash payment the landlord can offer.

5. Vendors – For some businesses, the vendors are so eager for additional points of distribution that they have funding available to contribute to the opening costs of a new business. In addition vendors typically can offer generous lines of credit to finance initial inventory costs and to help reduce the needed capital in start up phase.

6. Customers – Have you ever heard of customers pre-paying for services in exchange for a discount? Making a new sale can be a great source of interest-free financing for your business. New sales help to enhance cash flow at the start of the business and also reduce the necessary working capital.

A Real Example

A business costs $200,000 to open and the owner has $50,000 in savings and is seeking a $150,000 additional financing.

Can It Be Done?

Yes, It Can!

• $60,000 LEASE: The owner leases $60,000 worth of equipment required for the business

• $60,000 LANDLORD: The owner negotiates an allowance from the Landlord in addition to free rent for 90 days

• $20,000 VENDOR: The company vendor contributes.to the opening of the business

• $10,000 CUSTOMER: This is generated from new customer sales in his first month of business in the form of prepayment of services

This equates to a total of $150,000 in alternative financing.

By taking the time to commit and focus on the types of business financing available, these efforts will enable the business owner to not only launch the business, but offer the business an opportunity to excel with a stronger financial position.