Tweet

Why doesnt the SBA include franchise territories in their loans and how am I supposed to finance the territory

Written by: Michele Slevin

Article Overview: This article will provide one very unique way to finance your franchise territory without carrying the liability of a loan!

Why doesnt the SBA include franchise territories in their loans and how am I supposed to finance the territory

Financing a franchise may be easy, but financing a franchise territory may not. Franchise territories can range from 20K to 250K. All start-up costs of a franchise are covered by franchise loans such as the loan programs SBA lenders provide. However, the SBA does not include territory fees in their loans because lenders feel it is too risky to take on. Your ability to pay back that type of loan relies on your success in obtaining franchisees to start-up within your territory, because that's how you will make money. Suppose you purchase a territory and you don't sign on a franchisee for a year! SBA lenders don't want that risk!
Now you need to look at other financing sources. Sure, you can always turn to unconventional ways of financing a franchise territory such as turning to your home equity. But do you want to go down that road. We touched base on this in another article when we mentioned that you wouldn't hire a plumber to do the electrical in your house, so why use your home equity to finance a business!
So, where do you turn now? Well, perhaps you or your spouse has a retirement fund. If you have retirement funds of 50K or more, there are retirement rollover programs now that don't have any penalties or taxes involved when you are using any of those retirement funds to get your new business going. This is probably your best bet to purchase your territory because then your not carrying the liability of a loan. Rolling retirement funds to start-up or purchase a business is a newer concept to almost everyone, especially when there are no penalties or taxes involved.
We always thought that retirement funds could not be touched until we were of retirement age but even if we could touch them, we would draw on that fund usually carrying penalties. However, these newer IRS approved programs help you establish a corporation for your business and your new corporation will then establish it's own retirement plan. Then you can roll your existing retirement funds into your new corporations retirement plan. The retirement plan then purchases stock in your corporation. Basically, you're investing your own money into your own business rather than someone else's. Meanwhile, some of the funds can be utilized to purchase a business, whether it be for a territory or other franchise fees, a loan down payment or to purchase the entire business! This only applies if you are either leaving your present employment or if any of the funds are from a previous employer. Feel free to visit www.theslevingroup.com or email michele@theslevingroup.com to learn more.

Related Articles
  Will That Franchise Work in My Community?
  Ensuring Franchise Success
  What Every Entrepreneur Should Know About How To Finance A Franchise In Canada – Financing Your Investment
  Big Changes Coming in Franchise UFOC Meet the FDD
  Ways to Obtain Financing to Buy a Franchise

Article Tags: 20k, best bet, corporations, franchise loans, franchise territories, franchise territory, franchisee, franchisees, home equity, irs, loan programs, new business, plumber, retirement age, retirement fund, retirement funds, retirement plan, risk, sba lenders, unconventional ways



Related Forum Posts
Re: What Franchisors Want From Franchisees - In my experience one of the things franchisors look for is the professionalism of a candidate. I have run across quite a few times where I had a candidate looking a certain franchise and the other person that was looking at the same territory made their decision first and my client was left without a territory. That being said, my client did make their decision, it was just a day too late, but we didn't know that at the time, so the franchisor went to the drawing board and without overloading the market figured out a way to create 2 territories by moving the 1 territory over and establishing another one. Both franchisees were happy and the franchisor got a 2fer. Talking with the franchisor afterward they told me one of the main reasons they did that was because of the responsiveness of my candidate. They say this was very professional and it wasn't just the $$ that made them create the additional territory, although I am sure that played a part, but they really worked with all of the existing franchise owners and the new one and my candidate to get this done.
Franchise Territories - [quote="franchisebrief.com":1dfdbmhp]This information will be included in the UFOC. If the UFOC states that there is no protected territory, then I would be suspicious. If UFOC states that each franchisee will have its own territory, then there should not be any problem.[/quote:1dfdbmhp] Any franchises that I'm familiar with have a territory or distance provision that prevents franchisees from overlapping their territories. This is only a problem when you have an underproducing franchisee - but they should also have a provision to give a franchisee a set amount of time to make a go of the location and territrory. Shri
Re: Franchise Territories - [quote="litekepr":24ik1lrb] Any franchises that I'm familiar with have a territory or distance provision that prevents franchisees from overlapping their territories. [/quote:24ik1lrb] Quizno's didn't have this provision included in their UFOC. Some Quizno's owner ended up having another Quizno's restaurant a few blocks away, which of course doesn't make sense at all. I believe they have now changed their UFOC, and their general franchise policy.
Financing franchises - In the interests of full disclosure I will state first that I am new to this forum and that I am an independent lender. I have been in business for 18 years and I have been financing franchises, almost exclusively, for the past 12 years. My company has financed approximately 3000 franchise locations, primarily food service franchises. I say this, not as a commercial, but to establish my credentials on this forum. Quite frankly, I have read some of the posts regarding franchise finance and I find them to be less than accurate. Our product is a fixed rate, 84 month, unsecured (that's right I do not take people's houses nor do I need them to cash out their 401K). Our rates are at or below the fully secured, variable rate structured loans of the SBA and we do not charge points or fees, other than standard documentation and legal expenses. We finance primarily "in line" stores and do not get involved in real estate transactions. Our average loan exposure is approximately $200K but we fund loans as small as $25K for remodeling programs up to $2MM for acquisition and multi-unit franchisees. We are true cash flow lenders. The one caveat is that I am very picky about the franchise systems I will finance with this kind of program. We are an "A" lender with a very low rate of default due primarily to the expertise we have developed in underwriting the actually franchise business model. The reason that the franchiser may have declined you is that they felt your net worth was insufficient to operate the 7 locations, even though you were able to borrow sufficient funds to complete the purchase. It is also possible that the franchiser retains the right to match the offer you gave the seller. Have you thought of this or asked if that was the case? Given your statement about your net worth, I am actually surprised that you were able to secure loan approval in that large amount. Can you tell me what the actually selling price is and how the repayment would be structured? If a bank did get comfortable with that kind of loan exposure the business must be throwing off quite a bit of cash flow. Do you have a significant source of continuing income beyond the franchise business you are buying? Before giving up, I would advise that you explore the questions above. Also, I would advise that you appeal the decline to the top management at the franchise system but, be prepared to demonstrate that you have both the know how and the capital to operate the business andor grow it in accordance with the franchise system plans for that area. This may include an agreement with key managers to remain with you. If possible you may want to offer the key people an employment contract to stay on with you as you take over the business. If the business were profitable enough to support the large loan exposure then I would surmise that it is also a meaningful source of royalty revenue for the franchiser. They may see your lack of experience and relatively low net worth as potential risk factors that may affect the royalties being produced by these locations. Also, if the locations are well established the franchiser will rightly be concerned about reputation issues with their brand, should a buyer fail to maintain the business?
Buy a franchise, get 4 free! - I just called a franchise company (I'll keep the name for me) to ask them if they wanted to be listed in the upcoming edition of our top seller publication, the Bond's Franchise Guide. I knew I was gonna be a hard sale. I met the franchisor at the International Franchise Expo in DC a couple weeks ago and he's one of these guys who wants the world for free. I hadn't had the time to tell him about the price that he went "listen, I have a great deal for you. You give me a free listing in your Guide and I'll give you a free franchise!". I then remembered seeing on his booth a "marketing message" saying "Buy 1 franchise, get 4 Free". Basically, you buy the rights for a territory and they give you 4 other territories for free. I kindly declined the offer, trying to be as polite as I could to not offend this man. I knew I was wasting my time with him but I kept going anyways. For 5 solid minutes he tried as hard as he could to have me open a franchise in San Diego for free. I didn't want to confront him (after all, he's still a potential client) but I was saying to myself "what kind of franchise is that if you give it away to anyone and everyone?" This franchisor has only one thing in mind: opening as many franchise locations as possible. But he forgot one of the very basics of franchising: you have to have qualified franchisees... Duh! This means that because someone has the money doesn't automatically means he's going to be a good franchisee. Most franchisors are well aware of that. They'd rather see a very well qualified potential franchise buyer with little money than a totally unqualified potential franchisee with a lot of cash on hand. Those types of franchises usually don't last long. Why? Simply because the system starts collapsing from the inside: franchisees are not adequate for the system thus, they don't operate their store correctly. The brand image starts getting worse. The franchisor can't support its franchisees because he's too busy opening other franchises. Next thing you know, you're reading an article in the newspaper about how this franchise filed for bankruptcy. What do you guys think? If I come to you and say "if you buy a franchise, I'll give you 4 more for free". What would you think?


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Life is a Balancing Act!

The Golden Rule of Communications

Make Small Commitments. Get Big Changes.

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.