7 Ways Franchises Help Franchisees Obtain Financing Don't go to the same lender who helped you buy your house for franchise funding. Here are a few much better options.
By Jared Hecht Edited by Dan Bova
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From developing a business model, to building your branding and obtaining financing, starting your own business is an intimidating process. Many entrepreneurs pursue franchising as a form of business ownership, because it offers a more guaranteed model for success than starting over on your own.
Franchising provides a ready-made brand, a ready-made product and a ready-made process for success -- all adding up to a template franchisees can follow to build a successful business.
Related: Avoid These 3 Simple Mistakes When Buying a Franchise
In recent years, more and more franchise brands are extending that template beyond branding, menus and products to include financing help for would-be franchisees who struggle to obtain funding for their business.
"The average first-time franchisee has never taken out any form of business loan before, and their nearest understanding of financing is usually some form of consumer loan," says Nate Greenberg, Certified Financial Educator for Franchise America Finance. "It can be very frustrating for a new franchisee who comes from that background to learn the hard way that the lending sources who helped them buy their house or car are not necessarily the best sources to help them finance their franchise opportunity."
To keep new franchisees from having to reinvent the wheel, Greenberg says, many brands take steps to help facilitate the financing process. If you're new to franchising and don't know where to start looking for a small business loan, here are seven ways your franchise might be able to help.
1. Participating in the Small Business Administration (SBA) registry
Is your franchise a member of the SBA registry? This first and most basic step is an easy way for franchisors to assist with the financing process and a strong indicator of the quality of the franchise.
When a franchise joins the SBA registry, their franchise agreement is reviewed by the SBA and approved for use with all franchisees. This means loan applications for franchises on the Franchise Registry are processed faster and more efficiently by the SBA and its lenders, because the respective franchise agreements do not need to be reviewed for each individual franchisee situation.
Go to the SBA website to see an approved list of brands within the franchise registry.
2. Providing a bank credit report
Another simple way your franchisor may be able to help you obtain financing is by providing a bank credit report to your lender. This document gives your lender basic information about the franchise in terms that banks traditionally understand, which can speed up the approval process.
Legally, Greenberg says, the franchise agreement is the only document the franchise can use with you personally as the franchisee, so they can only provide a bank credit report directly to the lender. But if you're working with a lender, let your franchise know and ask them to send over a credit report.
3. Offering a list of recommended lenders
Not all lenders like to work with franchises. After a while, most brands have a shortlist of lenders with whom they know their franchisees have been successful. If you talk to your franchise, you may be able to get a list of recommended lenders who may be more amenable to approving your application.
In some cases, lenders might have a list readily available. In other cases, your franchise broker will be able to get you a few recommendations. Either way, having that starting point available will help you avoid wasting precious time completing applications with lenders who don't often approve franchise loans.
Related: Lending to Franchises Reaches the Highest Level Since the Recession
4. Matching franchisees with a lending facilitator
Does your franchise offer opportunities to work with a lending facilitator? Typically, this is done in two different ways. Either the franchisor has an in-house financing specialist who helps guide franchisees through the lending process, or they partner with a third-party loan broker to help facilitate financing.
One such loan broker is BoeFly, a business loan brokering firm that works with such franchisors as Meineke, Pearle Vision, TCBY, and Wild Birds Unlimited. Through BoeFly, franchisees of these brands are able to quickly and easily navigate through the lending process, and even work with lenders who are known entities to the brands.
5. Building strategic relationships with lenders
Some franchise brands build relationships with particular lenders over time, to the point that those lenders effectively allocate funds for a certain number of qualifying franchisees of that brand.
Greenberg says that more and more franchises are building these relationships directly with lenders, and a lot of that is a direct reaction to lending challenges from the 2008 recession, when "the brands who had lending relationships had a much easier time adding new franchise units than the brands that didn't." Although the lending climate has much recovered from the worst of the recession, franchisors are still keen to protect their opportunities for growth.
Of course, this doesn't change the fact that franchisees must meet certain basic standards to qualify. But because the lender already knows and trusts the brand, the qualification standards may be more forgiving than they would be through an independent lender.
6. Guaranteeing loans for franchisees
Occasionally, certain franchises are willing to help their franchisees qualify for loans by offering a guarantee program. These programs work similar to the SBA's loan guarantee program, meaning that the franchise takes responsibility for paying back a certain percentage of the loan in the event that you as the franchisee may default on your loan payments.
Guarantee programs can make a huge difference in a franchisee's ability to qualify for a loan. However, they are rare, and typically offered on a case by case basis. If you're already working with a franchise but struggling to obtain financing, ask if a guarantee program is something they'd be willing to consider.
7. Providing internal financing
Knowing that financing is typically the primary barrier to opening a franchise or adding additional units to an existing franchise network, a few companies have gone so far as to take the lending process in house.
Ace Hardware, for example, provides internal inventory financing to help existing franchisees open new stores without having to go back to the bank for financing. The UPS store offers a similar program for financing major equipment, and Marco's Pizza maintains a private equity fund to lend directly to qualified franchisees.
Taking the finance process in house is a trend Greenberg expects to grow in the next few years. "Right now franchisee lending is more vibrant, but there are folks who remember what it was like [during the recession], and they want to have funding sources available to support financial development over multiple units."
Regardless of what franchise opportunity you choose to pursue or what kind of financing help the franchise provides, make sure you educate yourself to understand exactly what is involved with franchise financing. Ask questions. Do your own research. Compare all of your various financing options -- both through the franchise and externally -- to make the best financing choice for your business goals.
