Preferred Financial Vendors
Getting educated about how you are going to finance your business is really important. You want to do it in the beginning of the discovery process. If you wait till the end you will delay your opportunity to open your business. I have several professional vendors I can refer you to.
If you are serious about considering a franchise, two things you need to begin to do – in parallel to your searching for a franchise – are learning about how funding works, and then starting the process of securing financing for your franchise purchase. Just as you needed to get “pre-qualified” before you purchased your home, so that you knew what you can afford, (and how much a financial services company would lend you,) you need to discuss these same things with your consultant and consider them when purchasing a franchise.
So why must this learning occur “in parallel?” Can’t you wait until you find the right franchise, then investigate financing? The answer to this is simple:
You can’t go hunting with an empty gun!
Your investigation process is going to take anywhere from 30 to 120 days. By the time you are ready to decide on a franchise you want to have your funding in place. Depending on the funding source, this funding can take an additional 1-2 months. Do you want to learn AFTER you have your heart set on a particular franchise that you can’t quite afford it? Or do you want to learn that you can’t open your business in time for the peak holiday season – because you missed getting your franchise financed on time? Of course not.
For all of these reasons, the financing part of your business investment should be complete, or near completion, as you decide on a business. If not, this could delay your progress by months.
Some possibilities for financing your franchise include any one or combinations of the following:
- Cash
- Home Equity Line of Credit
- Conventional Bank Loan
- If you happen to have a good personal relationship with a local banker, you might talk to them to see if they do small business loans. If not, ask for a couple of references.
- SBA Loan
- Equity Financing
- Retirement Account Financing
- Franchisor Financing
- Partners/Friends/Family/Angel Investors
Here are some more detailed comments, and references, for a few of these options…
ONE-STOP SHOPPING FOR YOUR FUNDING… AND SELF – DIRECTED RETIREMENT ACCOUNT FINANCING…
Many financial services companies offer complete turnkey services from pre-qualifying loan applications, professionally packaging and presenting them, to securing commitments and providing ongoing assistance throughout loan closing.
Ideally, the franchise you are considering (or your franchise coach) has relationships with companies that specialize in financing franchises – and, most importantly, are already familiar with the business models of many franchises. Because of this familiarity, working with these companies can save many entrepreneurs an enormous amount of time and effort – visiting multiple banks or searching the Internet, only to find sources that want you to submit business plans before they will even begin to consider you. And although business attorneys and accountants may be familiar with various funding sources, running clients through the full spectrum of options – and assisting with all the details and paperwork – is generally not part of their service mix.
The firms listed below understand the unique requirements of franchise capitalization and how to devise the optimal financial solution using personal equity, commercial lending, and private equity. They can advise you on the many options that exist and how they can be combined effectively to satisfy both your current and long-term financial goals. They can put together a capitalization strategy that works best for you, not one that works best for your eventual lender.
Services provided by one-stop funding sources:
- SBA Loans – they have a packager which is very important
- Conventional Loans
- Equipment Leases
- Retirement Account Conversions
- Cash Value Life Insurance Loans
- Cash-out Mortgage Refinances
- Loans/Partnerships with Friends/Family
- Loans Against Marketable Securities
- 401(k) Loans
- Private Equity
Many are surprised to see “retirement account conversions” on this list of services. In fact, most Americans are unaware that they can use their qualified retirement plans including 401k, 403b, IRA, profit-sharing, or annuity plan funds to purchase businesses, buy franchises or start entrepreneurial ventures. These companies have developed a completely legal, completely simple plan that allows you to invest your retirement funds in YOUR own business – without early withdrawal penalties.
The best way to describe these plans is that they conceptually work somewhat like a “rollover IRA.” (However, let these representatives explain the details to you properly.) Instead of rolling your IRA funds from Fidelity Investments Equity-Income Fund to another mutual fund – you roll funds into “Joe Smith, Inc.” so as to fund your venture. When your business begins to make a profit and you can repay your loan, you can transfer these “collateral funds” back into a financial instrument of your choice.
In addition to being a great source of initial financing, these programs provide significant on- going income tax deferral strategies. If you have a combined total of $50,000 or more in your retirement account(s), you should speak with these companies about how best to use their strategies for long-term business and personal financial planning.
SBA AND CONVENTIONAL LOAN FACILITATORS…
This is a very viable way to finance some franchises but please understand that the process takes a long time and it is important that you use a bank that knows how to package your loan. Lots of times a local bank will say they can fund your franchise and then after 30-60 days they tell you they can’t. That is why we always recommend that you use one of the funding sources above. They have a packager that will make sure you have the best chance possible to get your SBA loan. Why? Because to get an SBA loan you have to put together a package for the bank which might include your resume, business plan, tax returns etc. Also, it is important for you to understand you will have to offer collateral for the loan. Usually the bank will place a second on your home if you don’t have equipment that could collateralize the loan.
Recognizing that small businesses are an important part of our economy, the government has established through the SBA, its own loan program, the Small Business Investment Company Program (SBIC). The SBA does not make the loans but is primarily a guarantor of loans made by private and other institutions. You can find out more about the loans programs offered by the SBA at
http://www.sba.gov/financing/sbaloan/snapshot.html.
We hope this helps. You want to collect information to compare and contrast your loan options. Besides these SBA lenders you might want to see what type of conventional loan your current bank may provide you, as well as the home equity option.
To check out the terms on home equity go to www.ditech.com. It's a great way to shop for competitive rates. Most of the people we work with who have equity in their homes are taking that route. It is by far the lowest interest rate possible.
When checking out any loan options, be sure to check on:
- Length of Loan?
- Penalty for pre-payment?
- Interest Rate?
- How much is your cash injection?
- How much equity is needed and what type of equity can you use to secure the loan?
One other interesting website that you might want to check out is http://zillow.com. This is a very interesting site that will give you the current market value of your home – and all your neighbors too! Like anything else, you need to be sure that they have all the accurate information on your property before you go forward thinking that their number is the real value of your home.
I hope this information has been of help to you as you continue through the education process of your franchise investigation.