After you've determined the extent of financing available from the franchisor, make a working list of all other available sources of capital. Most sharp operators use the following sequence of contacts: friends and relatives, home mortgages, veterans' loans, bank loans, SBA loans and finance companies.
Often, banks that aren't willing to work with you based on your financial profile become more amenable if you suggest working with an SBA loan guarantee; these loans are guaranteed up to 90 percent by the SBA. Small businesses simply submit a loan application to the lender for initial review, and if the lender finds the application acceptable, it forwards the application and its credit analysis to the nearest SBA office. After SBA approval, the lender closes the loan and disburses the funds; the borrower makes loan payments to the lender.
Recently, franchisors report being approached by financial brokers--historically more interested in big deals--to put together large pools of money using SBA and private funds. These funds would be available to franchisees through the franchisors like a trust fund. Groups of smaller banks with funds to invest would contribute to the fund from allover the country.
Content Continues Below
Other options would be to take out a home-equity line of credit or a second mortgage on your home. Be careful when utilizing this type of financing, however. The home-equity line of credit and a second mortgage are secured by your home. If you can't repay the amount you finance using this source, you risk losing your home.
You can also use assets such as stocks, bonds, and mutual funds to secure a loan as long as they're not part of a qualified plan like an IRA profit-sharing plan. Also, if you are over age 59 and have a lot of money tied up in an IRA, you could use it for part of your financing requirements. Although you'll have to pay taxes on the amount used, not to mention suffer the loss of income from interest, it can be a good financing tool.
If you are under age 59 and your IRA is one of your largest assets, you still may be able to take advantage of this avenue without accruing the 10-percent penalty associated with early withdrawal. By taking Substantial Equal Periodic Payments spread over a minimum of five years, based on your life expectancy, and a set of annuity tables published by the IRS, you can eliminate the 10-percent penalty, although the money is still taxable.
What Do Franchise Lenders Really Look For?
We recently chatted with John Teat, national franchise lending director at Bank United, in Irving, Texas, to get the inside track on franchise lending. Bank United has begun lending to 35 different franchises in the last four months alone, so if you want to wow those lenders at your next meeting, listen up.
Nichole L. Torres: What do you look for in someone seeking a franchise loan?
John Teat: It actually depends on his or her industry. We prefer to have someone with some industry experience. If they don't have the experience, we're looking for strong franchise support. That's key for us. Also, from a purely financial side, if people want to acquire a quick-serve restaurant, they have to come up with the capital. We want to take a look at their financial statements to make sure they're not liquidating their complete cash position, that they do have something to fall back on.
Torres: How can loan applicants make the whole process run smoother?
Teat: By doing their homework about the franchise they're interested in. They should know everything about that franchise concept, because, when they approach us, what they're doing is trying to convince us to be a business partner.
Torres: What's the most important quality in a borrower?
Teat: To be considered for a loan, the prospective franchisee needs to be prepared to commit. [Franchisees] have to understand they no longer have paid vacations; and they have to face challenges with employees. I sit down with them and make sure they understand the volume and the value of that commitment.
I'm their business partner. I'm providing the capital and I have a certain consideration to my stockholders and their money. That's the most important thing: a commitment to making the business succeed.
Page
1 |
2 |
3 | 4 |
5 |
6 