Getting into Franchises with Limited Cash Flow
Franchises are some of the best investment opportunities available. Being able to tap into an established brand with a structure of best practices and procedures can be worth its weight in gold. Understandably, however, franchisors are looking for partners with deep pockets who can bring resources to the table for everyone’s benefit. Don’t worry if you don’t have a large net worth, though; these lending sources may still be able to help you own a franchise.
Let’s begin by looking at the franchise itself. Many franchises have a franchisor assistance program that will subsidize or back potential franchisees. It makes sense if you think about it; they want to grow and expand if simply leveraging their credit will make that a reality for a qualified franchisee, they may consider it well worth the risk.
Traditional Bank Loans
Putting franchisor assistance aside, the most common avenue potential franchisees pursue is the traditional bank loan. Bank loans for businesses are generally like personal loans, like mortgages or auto loans. For many, the stability of a loan backed by a bank is appealing. The drawback for some is the length of time it takes for decisions to be made and funds to be deposited. Still, the rates and terms are usually very favorable.
The U.S. Government’s SBA (Small Business Administration) offers loans as a form of economic stimulus. The conditions are very specific, but advantageous to people looking to purchase franchises. After exhausting traditional routes, an entrepreneur can apply for an SBA loan. If approved, the SBA will work with a traditional lender to secure funds by guaranteeing a portion of the loan. This makes the loan a less risky prospect for the bank, while still providing the benefits that traditional lending has to offer.
Lastly, alternative lenders may be a viable option for entrepreneurs seeking to buy a franchise. Typically, alternative lenders are private investors with an interest or expertise in a specific industry or geographic area. In some cases, the advantage of having a funding source that is not bound by the regulations and red tape of the banking industry is a very good thing. The major disadvantage for some people is that private investors often (understandably) want decision-making power in the business, which can be particularly tricky in a franchise situation.
At the end of the day, franchisees are usually safe investments and business opportunities, and, as you can see, there are many ways to finance the funds needed to buy-in.