Securing the finances to open your doors
There are more than 780,000 franchise establishments in the U.S. that support nearly 8.9 million direct jobs and $890 billion of economic output for the U.S. economy. Big business and growing.
Franchise businesses are expected to grow and create more jobs at a faster pace than the rest of the economy in 2015 for the fifth consecutive year, according to The Franchise Business Economic Outlook: 2015 by the International Franchise Association (IFA) Educational Foundation and IHS Economics.
And while this sector is growing and profiting, there is often one big roadblock to starting up and/or expanding a franchise – financing.
While some franchisors offer their own in-house financing programs, or have partnerships with a particular lending company, there are many situations where the parent company doesn't offer financing or additional financing options may be required. The good news is there are opportunities available for franchisees that need to seek financing on their own and for situations where franchisors are willing to lend support their franchisees throughout the process.
We recently worked with a large, Denver-based franchisor that was looking for a leasing solution for one of their wholly-owned franchisees. The franchisee needed a substantial upgrade to their voice and data systems. They found one leasing company who would approve the lease, but only under the condition that the parent company would guarantee the transaction. In this case, since the franchisor maintains a strict policy that each franchisee obtains their own financing, the original leasing company could not complete the deal without the financial support of the parent company or franchisor.
As a solution, we went through a detailed underwriting process to restructure the financing for the franchisee without the franchisor’s involvement. In this scenario, we were able to extend an approval to fund the lease, with the franchisee as the sole guarantor on the lease documentation. Additionally, we were able to structure progress payments to the vendors during the equipment installation process, which provided for a more efficient delivery.
There are numerous situations where leasing equipment through a third party vendor or commercial financing partner makes good financial sense for franchisees. Leasing essentially transfers the risk of owning that equipment away from the business owner and onto the third party. At the end of a lease term, franchisees or business owners can purchase the equipment outright for agreed fair market value, renew or extend the lease, or simply return the product and upgrade to more advanced technology. This kind of flexibility is often key for franchisees or business owners who have franchise or related brand standards that often change or require updates to systems, equipment or other substantial projects such as signage or remodeling.
As in any situation where a business is seeking financing, lease terms are often dictated by the credit application submitted through the partner leasing company. Established businesses or those with ties to a parent company or franchisor with a strong credit history can often gain the benefit of more attractive rates and terms, which often range from 24-48 months. Many lease agreements require little or no down payment, which provides an additional benefit for franchises when it comes to preserving valuable capital for other investments or using the cash for operating expenses.
The following are three quick franchise financing tips:
- Understand your franchisors financing policies and the amount and type of help they offer to franchisees
- Seek out lenders that not only understand small business but franchising as well
- Be prepared with a business plan and other requirements, including financial statements, bank referral and/or description of equipment and supplier
A sound financing strategy is key to any successful business and while franchise organizations work in different ways with franchisees as to the amount and type of support, there are a variety of flexible options available to serve the various and growing needs of franchisees and small business owners.