SBA loans are currently the most popular method of financing a startup franchise, according to Mr. Anderson. SBA loans are arranged through general banks and banks that specialize in franchise funding. A portion of such loans is guaranteed by the SBA. In addition, the target franchisor must be registered with the SBA; most well-known franchisors are.
“SBA loans are excellent for people who don’t have a lot of working capital,” says Mr. Anderson. “Interest rates are competitive, first-timers can borrow 80 percent, the terms are generally 10 years, and there’s no prepayment penalty.”
Such factors help keep monthly payments low. Candidates who develop a strong business plan usually are pre-qualified by the SBA.
One of the SBA’s fastest-growing programs is that for 7(a) guaranteed business loans, for amounts of $100,000 or less. It’s known as the low-documentation (“low doc”) program because it has a simple two-page application.
For entrepreneurs who have all the cash they need, equipment loans are a good strategy. The equipment is the collateral, so franchisees can finance 100 percent with nothing down. These loans average five to seven years and usually carry a prepayment penalty. “This can save franchisees about 20 percent,” estimates Mr. Fullerton.
Mr. Sandoval used a seven-year equipment loan from Bank of America to purchase his first McDonald’s in 1983. The prepayment penalty was the only downside, he recalls. When the opportunity to buy two more restaurants arose just 18 months into the loan, Mr. Sandoval had to pay the penalty when he sold his initial restaurant to buy the other two. He recommends negotiating away the prepayment penalty when possible. “You never know when an opportunity will come up to sell or refinance, so you need to be prepared,” he says.
Should first-time franchisees use a regular bank with which they have a relationship or an institution that specializes in franchise funding? The answer depends on whether the bank is familiar with the franchise industry. Franchisees generally have an easier time securing bank loans because they have the backing of an established company with marketplace experience (the franchisor), and franchise loans generally have a lower default rate, says Mr. DeBolt.
Franchise funding specialists often grant the loans faster and save the franchisee money through enhanced collateral, contends Mr. Anderson. “Because we know the franchise system, we can give collateral value to the franchise and the equipment, thus reducing the collateral needs of the applicant,” he says.
“We look at the worthiness of the franchisor as much as the prospective franchisee,” agrees Mr. Fullerton.
Traditional banks that aren’t familiar with the industry have to take time to educate themselves about how a particular franchise works before considering loan applications. In some instances, prospective franchisees may have to come up with 100 percent or even 125 percent in collateral with a traditional bank, according to Mr. Anderson.
Direct financing by franchisors is another option for reducing loan expenses, although not all franchise companies offer it. Terminix will finance up to 70 percent of the initial franchise fee with approved credit. Mail Boxes Etc. will help with up to $40,000 in financing for fixtures and equipment. Blimpie Subs & Salads offers equipment financing.
Franchisor programs aimed at women and minorities can offer substantial savings for candidates who qualify. “Cost savings can range from waiving all or part of the initial startup fee to giving the franchisee a fully stocked store to run on a trial basis,” explains Mr. Oldham.
AFC Enterprises – the Atlanta-based franchisor of quick-service restaurants such as Churchs Chicken, Seattle Coffee, and Cinnabon – offers the PLUS program to help candidates with five years of restaurant experience become franchisees. For qualified applicants, PLUS can reduce the startup requirements for a Churchs or Popeye’s Chicken franchise from the normal $200,000 in cash and $400,000 in net worth to as little as $50,000 and $250,000, respectively.
Whatever funding vehicle a franchisee might opt for, Messrs. Fullerton and Anderson stress the importance of overcapitalizing in the beginning to help ensure success. “Have the money the franchise says you should, and then some,” recommends Mr. Anderson.
Most Popular Stories
- SEO Traffic Lab Celebrate Wins at Digital Marketing Event 'Internet World 2013' in London
- Social Media Initiatives Should Follow Customers' Lead
- Apple CEO: Offshore Units Not a 'Tax Gimmick'
- U.S. Senate Accuses Apple of Large-scale Tax Avoidance
- UTEP Water Recycling Project Wins Venture Titles
- Marketo Makes a Mint in IPO: Stock Shoots Up More than 50 Percent
- Bieber Booed at Billboard Awards
- Crude Oil Up, Gasoline Down
- Austin Startup Compare Metrics Raises $3.5 Million for Expansion
- Why So Many Top 'Car Guys' Are Actually Women