Do it yourself

Of course if you can afford the startup costs yourself, you don’t need a loan – although it can make good business sense, depending on your circumstances. For years, franchisees used their home equity and 401(k) retirement funds to start their new business. That option proved less viable after the subprime crisis. Many also turned to family and friends who believed in them, but many of their finances suffered too, reducing the likelihood of finding help there.

For those whose homes have retained their value and who own or have a significant percentage of equity in their home, this time-tested source of business start-up funding is still a good alternative. You may have to go through more paperwork than you would have a few years ago, but you still can use your home as collateral – that is, if you’re willing.

Many new franchisees have the energy, drive, and skills to succeed, but lack the money to get started. If you’re one of these, consider pairing up with a money partner, angel investor, or even a venture capitalist interested in the brand or industry you’ve chosen. Your franchisor can be a big help here. Many good franchisors who turn down well-capitalized applicants with no operating or industry experience are willing to pair them up with an operator they’ve approved who lacks the startup capital.

Large banks, the traditional bulwark of small business loans, pulled back after the subprime debacle, making loans only to those who didn’t need them – no help for the many more who did. And traditional franchise industry lenders such as GE Capital and CIT pulled the plug on lending as well. In their stead, a series of alternative lenders entered the market in 2008 and 2009. Many will continue to fuel franchise expansion in years ahead. These include local and regional banks, credit unions.

The SBA will guarantee a significant portion of a loan, typically up to 80 percent. Note that the SBA does not make the loan, but guarantees a large percentage of it. In theory, this reduces the risk for bank lenders, making them more willing to lend to new businesses. And it worked well for years until the subprime loans hit the fan. In early 2009, Congress passed the American Recovery and Reinvestment Act, which allowed the SBA to raise its loan guarantee to as much as 90 percent and temporarily eliminate fees on others. For the most current information, visit the SBA’s website (www.sba.gov).

Franchisors listed on the SBA’s Franchise Registry offer an advantage to their franchisees seeking SBA-backed loans. Loan applications for brands listed on the Registry can be processed more quickly by the SBA and its lenders (banks) because the SBA has pre-approved their franchise agreement. Listing on the Franchise Registry adds credibility to a brand in the eyes of any knowledgeable lender.

Loan packagers or specialists

Finance companies specializing in franchise-related loans can help you in the early stages by guiding you through the lending maze. These specialists know the ropes and have connections in the lending community. These “loan packagers” will work with you from start to finish to improve your chances of success. Best of all, most get paid only if your loan comes through.

As the large franchise lenders pulled back, new and innovative lending companies specializing in franchising, even in selected brands or industry segments or niches, appeared to fill the gap. Rates may be slightly higher, but at least they’re making capital available. Many of these boutique lenders will stick around and become players.

As noted above, finding a source for funding your equipment purchase or lease will increase your chances of finding money for the rest of your new business. At the very least, it will reduce the amount you need from other lenders. Check with your franchisor to see if they have any deals with one or more equipment leasing and financing sources.

Landlords

In a good economy, landlords charge high rents and tenants pay for everything. In a down economy, the reverse is true, and you can negotiate many items before signing a lease: tenant improvement allowances, free rent, or reduced rents if a mall’s anchor tenant moves out. Since you may be new to negotiating commercial leases, it’s often worthwhile to hire a professional lease negotiator, consultant, or commercial real estate broker to represent you. Some franchisors have specialists on staff who can help franchisees get the best deal. And always run any lease agreement by an attorney experienced in this area. The up-front fees will pay off each month for the life of your lease.

Many programs exist for veterans of the U.S. Armed Forces. Under the SBA’s Patriot Express Pilot Loan Initiative, the SBA will guarantee up to 85 percent of the loan and requires lower credit scores for approval. These loans can be used for start-up, expansion, equipment purchases, working capital, inventory, or business-occupied real estate purchases. At the International Franchise Association (IFA), the VetFran program includes more than 300 franchisors that offer discounts and incentives to veterans on franchise fees and other startup expenses.

The IFA also assists and encourages minority participation in franchising through the IFA Diversity Institute and MinorityFran. Many franchisors involved in these initiatives offer financial incentives to minority applicants, such as reduced or deferred franchise fees. The IFA, in collaboration with local economic development officials and national organizations, holds seminars across the country to increase the presence of minorities at all levels of franchising.