How Does Funding A Franchise Work?
Funding your franchise
One of the ways a franchising company qualifies prospective franchisees is assessing adequacy of their capital. A franchising company must be satisfied that a prospective franchisee has sufficient funds to finance start-up costs, working capital and personal expenses until a franchise turns a profit. That could be three or more years from the time a store opens its doors to the public.
Franchise fees fall into two groups, namely, initial and continuing fees. Fee amounts vary widely depending on the type of the franchise. Taking a hotel franchise as an example, continuing fees include royalty fee, advertising or marketing fee, reservation fee, frequent traveler program fee and other miscellaneous fees.
Before accepting a prospect, a franchising company examines a prospect’s net worth, liquidity of assets, and the prospect’s credit bureau report as part of the qualifying process. Some franchises can cost a great deal of money and may require borrowing a loan from a bank or other sources. If that becomes the case, the franchising company will want to satisfy itself that the prospect would qualify for a reasonable loan to cover the franchise cost and ongoing working capital requirements until the venture becomes profitable.
Unfortunately, financing continues to be illusive and a problem for prospective franchise owners. In an effort to promote franchise ownership, many franchising companies are offering financing programs of their own. Others are offering creative financing programs for start-up franchise owners or those looking to expand. Programs range from zero-percent financing for a limited-term, lower license fees, reduced royalties and minority stake ownership by franchising companies in multi-unit outlets. For those that fail to qualify for franchising company’s financing, a SBA loan program is the way to go. It comes with all the attributes a startup would want – low down payment, low-interest rates and long tenures.
Gathering and putting together a SBA loan package and finding lenders with appetite for start-up franchises can be daunting and time-consuming. For most of the prospects, it is advisable to engage the services of a professional business plan writer and loan packaging expert to increase chances of being funded and the lender’s speed of feedback. A professional will provide a well-crafted business plan and financial statements projections prepared to the standard preferred by lenders.
As a prospective franchisee you will also have all the necessary SBA forms verified for accuracy and the package will be rigorously tested to ensure it has a high chance of being funded before being presented to lenders. You will receive a report on the shortcomings of the package and, working closely with you, a good professional will improve the package as necessary. Thereafter, if your loan package passes the screening test, it will be placed with SBA lenders for issuance of a letter of intent (LOI).