Financing your franchise - includes related articles - Franchising: Special Guide

Nation's Business, Sept, 1992 by Meg Whittemore

Among institutions with money to lend, franchising is attracting increased interest. "The smart money on Wall Street is watching franchising," says Carol Hance, a financial strategic adviser and managing director of Strategic Advisory Group, in Sag Harbor, N.Y. Her partner, Michael Seid, puts it another way: "In the 1950s, franchising was thought of as a somewhat sleazy business venture, but today [franchising] is highly thought of as a solid investment opportunity in the financial lending industry."

Even though there is said to be optimism among lenders toward franchising, finding money to start, buy, or expand a franchise remains a challenge for many borrowers. Although there are more varied funding sources and more creative methods of structuring a financing package than there have been in years past, borrowers still have to search out the sources and structure the deals.

Banks are beginning to loosen their funding reins where franchising is concerned, but many franchise experts say the reins are still held too tightly. Richard Godwin, president of The Packaging Store, a packaging and shipping franchise based in Englewood, Colo., earlier this year tried unsuccessfully to get a business line of credit from three different banks in the Denver area. "If the bank doesn't see hard assets as collateral, the deal dissipates," says Godwin, "even after we point to Me cabinets filled with franchisee contracts and say, "That pays us $2 million a year.'"

Franchise experts say the lending industry needs help in understanding franchising and, at this point, the education must come from the borrower. Don Ervin, a former banker and past president of the franchised Precision Tune company. and now a financial consultant on franchising, in Arlington, Va., says that "this is an opportunity for borrowers to really get to know their lenders" and to build a relationship that will work in their, favor. (See "Tips On Getting A Loan," on Page 55.)

But banks are not the only lending sources for would-be borrowers. Last year, commercial banks made only about 26 percent of all loans in the U.S. The remaining 74 percent of loans came from nonbank lending institutions, such as Capital Credit Corp., General Motors Acceptance Corp., and American Express. "That means that commercial banks will be stretching in try to reclaim that market," says Ervin.

Nonetheless, the borrower in franchising is left with the question of what approach would be best for obtaining financing. The answer for these times is to start thinking creatively. Beyond that, opinions vary on where to go, how to structure loans, and even on the outlook for getting a loan.

In its Franchise Opportunities Guide, Summer 1992 Edition, the International Franchise Association (IFA), a Washington, D.C.-based organization of franchisors, suggests the following tips for prospective borrowers:

* Determine your net worth by calculating your assets and liabilities. Many banks and lending institution printed forms to help you with these calculations.

* Determine your credit potential by reviewing your credit history. The IFA says poor credit history is the leading reason for rejection of loan applications. Your banker can tell you whom to contact for a copy of your credit rating.

* Develop a detailed business plan before going to a lending institution. The IFA says the plan should include a resume of your business experience, an estimate of your income and expenditures for the first year of your business, and a marketing plan. Your business plan should describe the franchise, analyze the competition, explain why you expect to succeed, and tell how you will sell the product or service.

The IFA says you should carefully consider the major sources of financing available to you. These sources can include friends and relatives, banks, a second mortgage on your home, borrowing against insurance, securities, or a loan through the U.S. Small Business Administration. It can even include the franchisor.

Some franchisors are offering a menu of financial aids that, when combined, cover the total start-up cost of the franchise. This approach can take various forms--equipment-leasing programs, waiver of the franchisee fee, in-house help to qualify for a loan, and arrangements with banks or lending institutions for financing packages.

"There is much more franchisor-assisted financing going on than ever before," says Les Rager, a franchise consultant in Atlanta, "because franchisors realize that in order to add units, they are going to have to offer some form of help to prospective franchisees."

John Graves, founder and president of Bike Line, a franchise headquartered in West Chester, Pa., tries to give potential franchisees a helping hand. He first sends the prospect to Bike Line's in-house financial adviser, a former bank loan officer. The adviser assesses the candidate's creditworthiness and recommends the next steps. We actively talk with their banks, and we have our banks to vouch for us as the franchisor," says Graves.