The Four C’s of Financing a Franchise Purchase
The Four C’s of Financing a Franchise Purchase
Answer: This is an often-asked question by those looking to join franchising as a franchisee. The best source of information about the options that might be available to you is the franchisor you are interested in joining. They should be familiar with the costs associated with each option and the likelihood of you obtaining financing from any particular source. It may also be helpful to understand the principals that underlie your ability to get financing, regardless of the lending source.
There’s an old adage formulated many years ago that’s still just as true today. There are four “C’s” involved in any decision to loan money to someone. They are Cash, Credit, Collateral and Character.
The fact is that it doesn’t matter whether you go to a bank, use the SBA guarantee service, or go to a friend or relative for the loan. The same basic rules will apply to any successful attempt to get credit. Here’s how the four C’s work:
Cash. One of the most common misconceptions people have is that they can borrow all of the money they need to open a business. Unless your personal net worth is far larger than what you need to borrow, this is almost certainly not true. Even given all of the other factors addressed below, you will almost certainly have to come up with cash out of your own assets equal to at least 25-30% of the total investment needed to start the business. Lenders like to make sure you personally have “skin in the game.”
Credit. Another thing that lenders insist on is a strong credit history. This means that they want to see a track record of you borrowing money and making your payments on time. Though your home mortgage might be the best example of a large loan you have serviced well, you’ll find that you get almost no credit for that type of loan. Everyone realizes that most people will take care of their mortgage before their other bills, so what they really want to see is a pattern involving timely payments on other types of loans. While a good credit history doesn’t mean you’ll get a loan, a bad one almost guarantees that you won’t.
Collateral. Most lenders will require that you completely secure any loan you want with personal assets sufficient to provide for 100% recovery if you default on the loan. It doesn’t matter one bit whether your business is a corporation or any other type of entity, or whether you go through the SBA process – they are going to look to you for collateral.
Character. The final condition you must meet relates to your character or reputation. Frankly this is like your credit history – having great character won’t ensure that you’ll receive a loan but having a bad reputation will almost guarantee that you won’t. Having strong enough character and a great reputation used to be enough to offset a lack in some of the other C’s but those days went out the window with the S&L crises 15 years ago, at least as far as any regulated lender is concerned.
You also mentioned a lender’s request for a complete business plan. You should have a complete business plan before embarking on any new business start up for a host of other reasons besides just financing. If you don’t have one, stop everything else and put it together. The franchisor you’re working with should have lots of helpful information or even a template already developed for this purpose.
Many franchisors have also set up programs with selected financial service companies to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process with a minimum of hassle for you. The first thing you should do, once you’re fairly certain that you’ve found the franchise you want to get, is to request this information from the franchisor and start looking into your options.
The key is to start early in your investigation process so that you can make a timely final decision.
The Four Cs of Financing a Franchise Purchase - To learn more about this author, visit Lori Kiser-Block's Website.
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Question: I’ve found the franchise I want but I don’t have enough cash to completely fund the start up of the business so I’m going to need to get a loan. I’m just starting to talk to banks and they seem to want a number of things I don’t have, like a complete business plan with projections for the business. They also expect me to personally guarantee the loan even though the business is a corporation. Is my best option to use the SBA in order to avoid these hassles or what should I do?
Answer: This is an often-asked question by those looking to join franchising as a franchisee. The best source of information about the options that might be available to you is the franchisor you are interested in joining. They should be familiar with the costs associated with each option and the likelihood of you obtaining financing from any particular source. It may also be helpful to understand the principals that underlie your ability to get financing, regardless of the lending source.
There’s an old adage formulated many years ago that’s still just as true today. There are four “C’s” involved in any decision to loan money to someone. They are Cash, Credit, Collateral and Character.
The fact is that it doesn’t matter whether you go to a bank, use the SBA guarantee service, or go to a friend or relative for the loan. The same basic rules will apply to any successful attempt to get credit. Here’s how the four C’s work:
Cash. One of the most common misconceptions people have is that they can borrow all of the money they need to open a business. Unless your personal net worth is far larger than what you need to borrow, this is almost certainly not true. Even given all of the other factors addressed below, you will almost certainly have to come up with cash out of your own assets equal to at least 25-30% of the total investment needed to start the business. Lenders like to make sure you personally have “skin in the game.”
Credit. Another thing that lenders insist on is a strong credit history. This means that they want to see a track record of you borrowing money and making your payments on time. Though your home mortgage might be the best example of a large loan you have serviced well, you’ll find that you get almost no credit for that type of loan. Everyone realizes that most people will take care of their mortgage before their other bills, so what they really want to see is a pattern involving timely payments on other types of loans. While a good credit history doesn’t mean you’ll get a loan, a bad one almost guarantees that you won’t.
Collateral. Most lenders will require that you completely secure any loan you want with personal assets sufficient to provide for 100% recovery if you default on the loan. It doesn’t matter one bit whether your business is a corporation or any other type of entity, or whether you go through the SBA process – they are going to look to you for collateral.
Character. The final condition you must meet relates to your character or reputation. Frankly this is like your credit history – having great character won’t ensure that you’ll receive a loan but having a bad reputation will almost guarantee that you won’t. Having strong enough character and a great reputation used to be enough to offset a lack in some of the other C’s but those days went out the window with the S&L crises 15 years ago, at least as far as any regulated lender is concerned.
You also mentioned a lender’s request for a complete business plan. You should have a complete business plan before embarking on any new business start up for a host of other reasons besides just financing. If you don’t have one, stop everything else and put it together. The franchisor you’re working with should have lots of helpful information or even a template already developed for this purpose.
Many franchisors have also set up programs with selected financial service companies to facilitate rapid funding of their franchisees. In this case, they should be able to walk you through the process with a minimum of hassle for you. The first thing you should do, once you’re fairly certain that you’ve found the franchise you want to get, is to request this information from the franchisor and start looking into your options.
The key is to start early in your investigation process so that you can make a timely final decision.
The Four Cs of Financing a Franchise Purchase - To learn more about this author, visit Lori Kiser-Block's Website.
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John PowerJohn Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a “hands-on” franchise consultant. He said, “I am the ‘nuts and bolts’ person who tends to the details for my clients.” Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website |
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
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Jay Kubassek(Jay's Full Bio: EvanCarmichael.com/jaykubassek) In five years, Canadian-born entrepreneur Jay Kubassek went from selling mufflers at a Midas franchise to revolutionizing Internet marketing with the 2004 launch of CarbonCopyPRO, a online marketing education company, now worth over $20 million with customers in over 160 countries.
As an independent film producer, his upstart film fund Aliquot Films is currently producing a films with Spike Lee and Abel Fererra (starring Ethan Hawke and Dennis Hopper.)
Jay's entrepreneurial spirit is irrepressible. He’s the owner of five companies, a professional speaker and trainer, international real estate developer/investor, extreme sport enthusiast and emerging philanthropist. Jay resides in NYC with his wife Jamie, son Milo and dog Cooper. Visit Jay's official website: www.JayKubassek.com - Visit Jay Kubassek's Website |
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