In the downsizing era a franchise became a popular choice for people who were getting laid off or taking early retirement. Now people who are disillusioned with their jobs are quitting to reduce the stress or do something different. They want to be their own boss and a franchise is still a popular choice but financing has become more difficult.

As franchising has matured so too have the different offerings and franchise opportunities. Many of the new franchise concepts do not yet have a successful track record of placing people in new units. This makes it difficult for a would be franchise operator to obtain financing because there is not much difference in the risk between a start up and some franchises and the banks know it. So what is a business person to do to get financing?

Make An Equity Play

In cases like these it is best to seek financing through offering investors equity. This can be accomplished by getting a manager or a partner with direct experience to invest in the operation. Sure you give up a portion of equity and future profits but unless you are willing to pledge personal assets and a personal guarantee you will not get he financing you need.

Trends indicate that prospective franchise owners are looking for investments less than 250,000. They all want something that is easy to run and less than 10 employees. This makes sense to me because they are buying a franchise to simplify life and get away from the high stress business environment they just away from.

Check Out The Franchise First

When doing your research in selecting your franchise there is one simple thing you can do to make sure that you get the financing you need. Make sure that the franchisor is listed in the Small Business Administration Registry. Not all are. To be on the list a franchisor has to submit a Uniform Franchise Offering Circular and pay a fee to the SBA. The SBA then conducts a complete review to make sure that they adhere to the SBA standard operating procedures, one of the important steps to approval. Without the SBA approval even if you are a strong borrower the SBA will deny the loan guarantee. This means the bank has to assume all the risk or else get you assume more risk by bringing in a partner who is solid financially. That way if things go south they have two owners invested in making the business a success.

Can Your Franchisor Help With Financing?

If your franchisor has been around for awhile they should be able to help you obtain financing. In some cases they may have an exclusive relationship with a specific bank. This speeds the process and reduces fees because the franchisor pays those costs.

At a minimum they should be able to suggest lenders who know their system, track record and understand the business. One way of getting to this information is to ask the franchisor if they have any former bankers as franchisees or owners? If so, ask to be referred to them. When you call query them for specific information that they felt was important for their bank to know. If they were former employees they likely provided the bank with a thorough explanation of how the franchise system works and explained the concept to them. That way when you walk in, they are familiar with the concept and can use the past performance of other franchisees to assess the risk.

Industry Experience May Be A Requirement

Some franchisors have added additional restrictions such as requiring specific industry experience to qualify to open a franchise. In my experience franchisors prefer people who have general business and management experience.

Get Franchisor To Finance The Real Estate

One of the trends we can expect to see more of as interest rates rise is the use of sale/leasebacks. The franchisor literally buys the property then leases it back to the operator. This can be an important strategy for a franchisor because they can put the excess equity to work building new units