Creative Ways to Finance a Franchise Look Beyond the Local Bank for Loans

Funding a new business has gotten more challening in today’s credit crisis, there’s no doubt about it. But franchisors and franchisees alike are coming up with creative solutions to a bank loan.

Many franchisors solve the problem by arranging for third-party loans or in-house loan facilities. Of course, a credit score is an important part of the puzzle. Other franchisors have registered their companies with the Small Business Administration which can make it easier — or at least require less paperwork — in getting an SBA-backed loan. In the current environment, even franchisors who didn’t offer such a program six months ago are getting in on the act; their survival depends on it. So, for those who might have explored franchise finance a year or two ago, look again.

Other creative ways:

• 401(k) or retirement plans: Granted, no one has as much equity in their retirement accounts as they did a year or two ago. But they can still provide a solid backbone from which to borrow against. Note that we are talking about borrowing against the 401(k); cashing it out brings on huge tax penalties, so do this only as a last resort (and consult your own tax professional for more information). Speaking of taxes, the Internal Revenue Services has changed the rules on these lately and some previous loan companies have gotten out of the business briefly, while trying to figure out the new rules. Make sure that the lendor is fully up on current IRS regulations.
• Use a credit card: For those who have been responsible with credit in the past — and whose cards aren’t currently maxed out — credit cards can provide a way to cover incidentals, such as equipment purchases or business cards. Make sure to have a plan to repay at least the minimum payment each month as credit cards will continue to be a vital part of start-up. Leave plenty of room below the credit limit for emergencies, too.
• Borrow from a family member: This can be one of the most dangerous areas of finance because people, in general, don’t follow standard business advice when family is involved. But make sure to write everything down. Spell out clearly exactly what’s expected and when. Is it a loan or an investment? If it’s a loan, the lendor expects to be paid back if the business fails. If it’s an investment, the lendor will benefit proportionately if the business succeeds. Some family members may merely want to support the would-be entrepreneur; others may want a more reliable investment than the stock market. Know what the lendor is looking for. Also discuss what role the lendor will play in the business and what sort of information the business owner is requred to discuss. Spell it out and write it down. That’s the best way to safeguard family relationships. When it works, it works well. When it doesn’t, relationships are often the casualty.

Knowing where to find financing for a franchise has certainly gotten more challenging in the past. However, that doesn’t mean that it’s impossible. Franchises continue to grow and to succeed at better rates than standalone businesses.For those who have been laid off, or are in fear of it, or those who are bold enough to try a new business in this environment, the rewards can be great.