Financing your franchise business: means of securing capital

Black Enterprise, Sept, 2004 by Mark N. Howard

How much money do you need to start a business?

Start-up costs for franchises can range from $5,000 to several million. In an IFA survey conducted in 1998 on franchising, 88% of franchisors charge an initial franchise fee of $40,000 or less. The survey also revealed that an average investment, excluding real estate costs, was $318,975. You MUST clarity if this total cost includes working capital and living expenses while you build the business. The major costs associated with starting a franchise include:

* Franchise & Training Fees

* Equipment Fees

* Software & License Fees

* Location Costs

* Miscellaneous (Advertising, Utilities, Rent, etc.)

Entrepreneurs in search of financing for their business need to address the following six areas:

1) Decide on the type of franchise and franchise sector before you start investigating finance options. My recommendation is to 1st get a loan application from your bank, start identifying the characteristics of the ideal business for you, then dive into steps 2-6.

2) Submit a business plan that describes your "Five C's. Character (reputation & honesty). Capacity (business acumen & experience). Cash Flow/Capital (ability to meet debt-service payments). Collateral (access to assets that can be liquidated in the event of a default). Lenders will also check your Credit to judge your ability to consistently pay oil this loan.

3) There are many sources of capital, so research a couple of options to see what makes the most sense for volt.

4) You will need to inject about 1/3 of the total project cost front Voter own resources and can look to a bank to loan the remaining 2/3 of the total project cost.

5) The number one reason small businesses fail is undercapitalization or inadequate cash flow. Prepare for this by having at least 6 months of living expenses set aside, and having sufficient working capital built in to your operating budge.

6) Consult with the franchisor--they are in the business of expanding their operation, and will help you with the loan application process.

Where can you get the funds?

(1) According to the Small Business Development Centers, over 70% of small businesses tap into home equity or personal and retirement savings to partially fund their new venture. Several states allow residents to have home equity "lines of credit", where you can access up to 85% of the equity in your house, but are not required to take it all out at once,

(2) You can always apply for a traditional commercial bank loan. Franchisees generally have an easier time securing bank loans than do independent business owners because they have the franchisors track record working in their favor.

(3) The SBA offers alternative loan options to those entrepreneurs who cannot secure traditional commercial loans, and typically offer comparable rates and terms. One of the most popular SBA program is the LowDoc program where entrepreneurs can request up to $150,000, have up to 85% of the loan guaranteed, and receive an approval response within 36 hours of submitting a complete application. The typical 7(a) SBA loan has a maximum amount of $2 Million, with up to 25 year maturity periods, and up to 85% guarantee for loans less than $150,000, and 75% guarantee for loans above $150,000.

(4) Several lending institutions have qualified for the government's Preferred Lender Program (PEP). Under the PLP, the SBA delegates loan approval, closing, and most servicing and liquidation authority and responsibility to these carefully selected lenders, thereby drastically quickening the process.

(5) About thirty percent of franchise companies offer financial assistance themselves. These programs might include franchise fee loans, equipment loan packages, building renovation packages, among others. The franchisor will have relationships with property and equipment leasing companies to provide other funding options. It is very common for new business owners to lease their equipment instead of purchasing to minimize their up-front out of pocket expense.

(6) Many entrepreneurs are tapping into venture capital and angel investors to help start their business. You need to weigh the benefit of funds from VC's vs. the return they are expecting and the involvement in and control they demand of your business.

SOURCES

Business & Industry Development Companies--www.communitycapital.net

Business Resource Store (The)--www.businessresurcesote.com

Capital Funding Group--SBA--www.leaseapp.com

CIT--www.cit.com

Franchise Finance--www.franchise-finance.com

Franchise Funding LLC--www.franchise-funding.com

Franchise Registry--www.franchiseregistry.com

Precision Capital Solutions--www.precisioncapital.com

Small Business Administration--www.sba.gove

Small Business Development center--www.sbaonline.sba.gove/sbdc

Meineke

Meineke Car Care Centers, Inc

CHARLOTTE, NC (June 15, 2004, Press Release) -- Meineke Car Care Centers, Inc., with world headquarters in Charlotte, NC, donated more than $43,000 to the Children's Miracle Network (CMN) during the charity's Annual Broadcast June 5th and 6th. Now in its 7th year as a CMN sponsor, the Meineke chain has raised more than $500,000 to Children's Miracle Network, which supports children's hospitals across the US and Canada.