So you want to Buy and Finance a Franchise...
Where do you begin? Some feel the best place to start is with the most popular franchises "the local fast food joints". You know which ones I'm talking about because you pass them every day. The Franchises we're all accustom to seeing on our way to and from work or while we're out shopping. The ones that the kids always beg for you to stop at and go through the drive- thru.
You do some research on the internet and much to your surprise it can cost anywhere from 740K to One Million dollars to open one of those most famous fast food restaurants. As you read feverishly through the information you learn there is a 55K initial investment (Franchise Fee) just to get started. Then there's the build out, the leasehold improvements, equipment/machinery to purchase...etc. My, my what's this all about?
OK, so you don't have a million bucks, but maybe you have the 55K in savings or at least attainable from another source like stocks/bonds, equity in your home, or even between you and a partner! You know you can probably finance the rest. Well, do you also know you need a half a million in Net worth to obtain this large franchise investment? Soon as you come down to reality, you'll begin to think on a smaller scale but there are so many franchises out there and you have no clue where to begin. You're bound to find something but which franchises are good ones, which make money and which can you afford? One might think looking on the internet is a good place to start because the internet is searchable with tons of information. This is true, but how do you weed through them all? Perhaps a franchise consultant can assist you in finding a franchise and they are your best bet when you are ready to begin researching different franchise opportunities. Franchise Consultants have the knowledge and resources and will explain franchisor guide lines to you. You should take advantage of their knowledge. Franchise consultants are a great way to obtain information, and at no cost to you.
Although you may think it's a great place to begin, it's actually not the place to start! You do not research franchises until you know you can obtain financing for one. And you certainly do not pay franchise fees until you know that you can qualify for financing. It's a huge mistake (and the most common) that I've experienced with prospects who come to me for financing advice just a little too late.
Franchise fees are usually non-refundable so you don't want to find yourself devastated when you can't get them back. One can blow their entire life savings on this and you don't want to go there.
The truth is that the best place to start is by finding out how much of a business loan you are able to qualify for, then you can begin researching franchises within that range. With that being said, I'll bet I know your next thoughts. You're thinking "I'll just head down to my local bank".
I know the drill, you've been with them for years, have your checking and savings there, the kids college fund and you've even obtained your mortgage there, right? So why not a business loan too? Wrong.
Are you aware that most traditional banks don't (or won't) pre-qualify you for financing? And even if they do it's not an accurate pre-qualification. They might run your credit and tell you you're a good candidate just because your credit is good. Then they'll get you to complete a loan application. Anyone can accept your loan application but the question is can they get it approved? Proper pre-qualification for financing lies within an institute that can look at your loan application the way a lender will. Take everything into consideration and identify potential loan problems before you make any commitments. Can and will your bank do that for you?
There are other things they aren't telling you either. For example, look at collateral. The general rule with the SBA is that you match the loan amount one to one, but only if you have the collateral available to do so. Any eligible and available collateral up to the loan amount will be considered by a lender but if you cannot match the loan amount, sometimes it can still be approved. Local and Traditional Banks want full collateral or they will decline your loan regardless of what the SBA general rule is. But your bank won't tell you that up front. They also neglect to tell you that they aren't educated with franchises and that they look at those type of loans as risky and difficult. Believe me, that's only where the problems begin.
The best place to go for franchise financing is a franchise funding broker. One who deals with pro-franchise lenders who are familiar with this type of business. Loan Brokers who work with SBA financing are your best bet. Submitting a loan application to the proper lender is just about everything and Brokers know which lenders will approve what type of loan. A franchise financing expert has multiple Lender resources available. You can speak to a loan consultant by request by visiting www.bizloansref.com
Even if your local bank does SBA loans, don't be fooled because most banks will more than likely only offer you 5 to 7 year terms, although the SBA allows up to 10 years! Traditional banks have their own criteria even when they can follow SBA general rules, however, it doesn't mean they have to...but your bank won't tell you that either.
OK, so some of you think you will do better if you obtain a home equity loan or equity line of credit to open your business, right? Wrong. Sure, you may get a better rate or even longer terms. But when weighing out the pros and cons of this one, you'll quickly come back down to earth.
Here's some questions to ponder: Do you know what questions to ask when weighing out the home equity option or other options while comparing loans? How much will closing costs run? Are they included in your loan? Can they be included in your loan? Aside from funding your business just to open up, what about working capital? Do you have enough home equity to cover this too? How much working capital should you have for your franchise? Do you need working capital? Why do you need working capital? Can you obtain a working capital loan if you financed your franchise on your own? You may think you'll be alright flying solo with the home equity loan to fund your business, but trust me, you aren't.
Would you hire a plumber to do the electrical in your home? Would you hire a dog sitter or stranger to take care of your children? Of course not, so why obtain a home equity loan for your business when there are business loans for that?
Lets touch base on a conventional loan for your franchise. Do you know these loans are reviewed / renewed every 3 - 5 years and that the bank can "suddenly" decide it's risk appetite no longer favors this type of loan and they can demand payment in full? Now there's a kick in the head!
Even if your business is doing well, the loan can be renewed, re-amortized and then your paying more interest and who's paying the thousands in costs for the renewal & re-application? Certainly not the guy who sold you on the conventional loan for your franchise! It's very important to take proper steps before financing your franchise or other type of new business. Follow me, I'll guide you through!
Michele Slevin Free business loan prequalification, free franchise consulting, equipment leasing, retirement rollovers (without penalties or taxes) and so much more!
You can Email the author of this article, Michele Slevin at michele@theslevingroup.com or feel free to visit us at www.theslevingroup.com
Buying Financing a Franchise - To learn more about this author, visit Michele Slevin's Website.
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