With a success rate averaging 95 percent, franchising can be a lucrative option for Hispanic executives who want to go into business for themselves. Former banker Ernie Sandoval, for example, has seen his McDonald’s franchise grow into a HISPANIC BUSINESS® 500 company, with 10 restaurants in San Diego.
In fact, it’s an especially good time for Hispanics to consider franchising. “The $350 billion Hispanic market has put recruiting Hispanic franchisees at the top of the radar screen for many franchisors,” says Don DeBolt, president of the International Franchise Association (IFA), an industry trade group.
Unlike other new business ventures, franchises don’t require owners to start from scratch. Getting started still requires money, of course. How much varies with the company. According to the IFA, the average startup investment for eight out of 10 franchises, excluding real estate, is less than $250,000. Almost half require less than $100,000.
A glance through the spec sheets of franchisors listed on the IFA Web site (www.franchise.org) reveals a broad range of figures. Terminix pest control requires startup cash of $18,200 and a total investment beginning at $51,000. McDonald’s startup investments begin at $409,000, and Taco Bell requires a $3 million investment for a minimum of three restaurants.
Where should entrepreneurs look for startup financing?
A majority of franchise startup loans originate with commercial banks and independent financing specialists, or the U.S. Small Business Administration (SBA). Bank of America has created funding pools for minority franchise owners, for instance.
Some franchisors either offer direct financing themselves or help franchisees find a bank or lender. Most have lists of bank and non-bank preferred lenders with which they have good relations. Growing numbers of franchisors offer programs that help women and minorities become franchisees by reducing the financial commitment, says Leon Oldham, Minorities in Franchising (MIF) committee chairman of the IFA.
Following are some specific funding sources:
* The Certified Development Co. is a private nonprofit organization licensed by the SBA to make loans to small and medium-size businesses in need of financing for industrial or commercial buildings, machinery, and equipment.
* Small Business Investment Companies (SBICs) provide equity capital and long-term debt financing, specializing in particular industries.
* Business and Industrial Development Corporations (BIDCOs) provide long-term debt financing to small businesses. They are operated under state programs with federal guarantees, but exist in only a handful of states.
* Community Development Corporations (CDCs) are an excellent resource, according to Mr. DeBolt. There are more than 4,000 nationwide.
The SBA has special funding programs for women and minorities, Mr. DeBolt adds, and other federal and state programs also help minorities with funding.
“Lenders expect the borrowers to provide a minimum of 20 percent to 30 percent down on a franchise loan,” explains Kirk Fullerton, senior vice-president and manager of SBA lending for Compass Bank, an SBA-preferred lender based in Dallas. “That means coming up with $50,000 to $200,000 of your own money, depending on the type of franchise.”
“The ideal net worth is one-and-a-half to two times the loan amount, in liquid cash or available on short notice,” says Rick Anderson, director of the Franchise Division of the IFA and general manager of finance for Arkansas-based Franchise Finance, also a specialist in franchise loans. An outside income, such as that of a working spouse, also is important in qualifying first-time franchisees, he says.
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