FUNDING YOUR FRANCHISE

Is your personal credit rating is okay to good? Do you have management or strong work experience? Can you invest 20% to 25% as a down payment toward the total cost of the business? Then, you should be able to receive financing.

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Financing is a key element in the start-up phase of any business. It is vital for you to have the funds to provide cash flow through the early stages so that you can expand it. Most franchisors will look very carefully at a number of key factors when assessing potential franchisees. These will include management or marketing experience and your fit with the company but will also involve an assessment of your financial capabilities.

It is easier to get financing for a franchised business.

One of the difficulties when considering a franchise opportunity is assessing exactly how much you can afford to invest. Many potential franchisees will come from employment and will be attracted to franchising because of the track record, experience and brand presence of the franchisor. It is such things that result in the lower failure rate of franchised start-ups. Fortunately, many lenders are also attracted by those same factors.

Many franchisors have track records that are known to lenders in their industry and make them comfortable with franchisees securing financing for a portion of their investment. This can be in many forms. It may include the leasing of vans or equipment and financing for the entire project.

In many cases, franchisors can recommend lenders with whom they have had a good experience. This may include someone other than a direct lender -- since these firms are often able to select the best source of financing from a pool of aggressive lenders. These firms are very familiar with Small Business Administration guaranteed loans.

Take advantage of the SBA loan program.

One of the most important sources for small business financing is the Small Business Administration (SBA). The SBA makes short- and long-term loans available for eligible, credit-worthy start-ups and existing small businesses that cannot obtain financing on reasonable terms through normal lending channels. They are not, however, only for businesses that cannot get funding any other way. The SBA loan programs include loans for most business purchases, including purchasing real estate, machineries and equipment, inventory, and working capital.

Use 401k or IRA money for the equity investment.

For the required 25% equity investment, you may choose to use your 401k and/or IRA. Then, finance the remaining balance as a business loan. Click here to learn how you can do this with no taxes, no penalties and no repayment.

Many franchises enjoy a streamlined SBA review process.

The Small Business Administration (SBA) Registry lists names of franchise companies whose franchisees enjoy the benefits of a streamlined review process for SBA loan applications. Loan applications for registered franchisors can be reviewed and processed quickly and efficiently.

Listing on this Registry means that the franchise agreement does not impose unacceptable control provisions on a franchisee (which could result in affiliation with a franchisor). The lender and/or SBA must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, creditworthiness, conflicts of interest, character, use of proceeds, and dissemination.

Click here to see the franchises listed with the SBA Registry.

Obtaining an SBA-guaranteed loan.

The SBA guarantees loans from a bank or commercial lending institution for a period of up to 10 years (25 years for real estate), with the SBA guaranteeing as much as 80 percent of the loan principal. This type of loan is comparatively inexpensive. Maximum allowed interest rates range from highs of prime plus 4.75 percentage points to prime plus 2.75 percentage points, though lenders can and often do charge less. These rates may be higher or lower than rates on nonguaranteed loans. Even better, banks making SBA loans cannot charge fees (known as commitment fees) for agreeing to make a loan, or repayment fees, which means the effective rates for SBA loans may be, in some instances, superior to those for conventional loans. The SBA guarantees $50,000 to $750,000 of loan principal.

To be eligible for an SBA loan, the borrower must meet these criteria:

While most banks, as well as select commercial finance companies, offer SBA loans, there are two specialized categories worth knowing about. These are Certified Lenders and Preferred Lenders, both of which have entered into contractual relationships with the SBA and officially participate in the Certified Lender/Preferred Lender programs (CLP/PLP).

These lender programs were designed to provide better response to borrowers; they accomplish this goal by placing additional responsibilities on the lenders for analysis, structuring, approval, servicing and liquidation of loans, within SBA guidelines.

About 850 lenders qualify for the SBA's Certified Lender Program, having met certain criteria, the most important of which, from the borrower's perspective, is extensive experience in SBA loan-guarantee processing. Certified lenders account for about 9 percent of all SBA business-loan guarantees. Since the certified bank does much of the SBA's work, the agency offers turnaround times of three business days for processing the application.

Approximately 500 lenders meet preferred lender standards. This group processes approximately 30 percent of SBA loans. Preferred lenders have full lending authority and as a result can offer a one-day turnaround on completed loan applications.

If you are seeking an SBA loan, your best bet is to work with a certified or preferred lender. The SBA-guarantee process is tricky at best, and you want a lender who has been through it more than once. To find certified or preferred lenders, visit the SBA website at www.sba.gov or ask the franchisor for a recommendation.