Franchise businesses serve as the backbone of the restaurant and retail industry. A successful franchise often starts as a small local business that catches the eye of savvy investors. Starbucks, McDonald’s, Walmart and Whole Foods are just a few of the many corporations that started as small mom-and-pop operations and were later franchised into nationwide networks.
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“Every person looking to invest into a franchiseneeds to do a comparison shop. You shop for a car, a tv, a house, and a phone. Why wouldn’t you shop for your business? It’s a larger investment and it is paramount that you need to do this. A lot of franchises don’t make it past 2-3 years, and a lot of that has to do with their comparison process, or lack of it, when they’re deciding which franchise to start.”
There are several loan programs aimed at helping first-time entrepreneurs set up their business. The Small Business Administration (SBA) operates the loan programs offered by the U.S. government. To qualify for the loan, your business must meet some criteria such as your business must operate in the United States, your business must qualify as a small business according to SBA guidelines, you must operate for profit and you should have a good credit score.
Also called a business cash advance, this option is only applicable to those having cash flow problems who would need ten thousand dollars or less. Cash advances usually have very high interest rates meaning that you will almost certainly pay more in the long run than the initial loan, especially if you miss a payment. Be certain you can repay on time before going this route.
Online lenders: While you may lack collateral, run a new business and need money quickly, you may find that an online lender is your best option. In general, online lenders should be a “last resort.” The average APR for online loans can be as high as 108 percent, making it difficult for small businesses to pay the money off before the debt balloons.
You do need to create a list of prospects before you reach out. This will help you focus on targeting the right areas and the right people. Do your research. If you’re selling a high-end product, you don’t want to target/cold-call customers in a low-income neighborhood. And, if you’re selling a product suited to children, should you really focus on the section of town that all the college students live in?
Glad to see your comment! For ideas on which franchise you should work with you can check out our articles on the best coffee shop franchises or the best restaurant franchises. Additionally, to make sure you’re finding a strong franchise, you can read our article on the 50 best and worst franchises by SBA default rate. I hope that helps, and good luck with your future business!
For existing franchises looking for working capital, another form of alternative financing comes from monetizing the franchise’s balance sheet to obtain funding. Using the franchise’s commercial real estate, or by tapping into the franchise owner’s personal real estate, an asset based lender can collateralize the real estate and provide working capital up to 90% of the real estate’s equity.
5. Social Media: Depending on your type of business, you will want a social media presence. LinkedIn, with more than 380 million members, is regarded as the business site for connecting with other businesspeople and offers excellent posting features for articles and blogs. Facebook is more of a social friends site than a business-focused site, but it’s also an excellent tool for “getting your word out” to your friends and customers. Both Linkedin and Facebook allow you to set up a commercial page for your new business.
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Loans backed by the Small Business Administration (SBA) are a favorite of franchisees, since they tend to have higher limits and lower rates than commercial loans. However, SBA loans come with strict requirements, including the need to prove that you don’t have the ability to obtain a loan from traditional lenders. Partner institutions disburse and administer the loans with SBA approval and application requirements tend to be quite extensive.
- Let's talk a little bit about the future. At some point your business is going to near the final stages of being a small business and start to evolve into a medium, or even a large-sized business. The question is: who is going to lead this business at that point? Before we talked about the org chart and the difference between the founder and the president. Odds are, you have been filling both roles. The founder is the visionary, and the president is the person who makes the business run. But, when it comes time to transition into that medium-sized business, really it's time for you exit one or both of these positions. Why is that? Well, you have learned certain skills that have helped you succeed as a small business owner, but, a different set of skills is required for a large or medium-sized business, and there are people out there who have those skills. They have that expertise, and it's much better to hire someone else, rather than you put this burden on yourself. I've often seen…
Part of the reason we spent a full day researching and figuring out location has to do with what it will cost you to start. If you’re working from home and not seeing clients, you may find your startup costs are limited to marketing, stationery, any supplies, and legal. If not, you’re going to need enough to set aside for at least the first months rent and utilities of the new space, including all the amenities to outfit your new office.
6. Create local awareness and establish a network. Join chambers, business associations, community groups, etc. Find ways to get involved. Networking is a great way to capture business leads as long as you don’t come on too strong. It allows you to meet new contacts and create more brand awareness and new referrals. Sponsor sporting events, nonprofit events or anything that is for a good cause. Get your name out there while also being a good community steward. Give away SWAG (promotional items with your business name, logo and contact info on them). T-shirts are a great example of free walking advertisements for your business.
If your DSCR is less than one, you have negative cash flow because company income isn't enough to repay debt. Getting a loan will be difficult. Typically, lenders want to see at least a 1.35 DSCR, which would mean that if your organization's annual net operating income is $70,000, you wouldn't want to borrow more than around $51,800. However, the higher your DSCR, the better your chances of being approved for a loan on favorable terms.
Keep in mind that whenever you’re applying for a business loan, whether it’s for start-up costs, working capital, or real estate, it’s a good idea to complete more than one loan application so you can compare rates and terms. Most lenders will only do a “soft” pull on your credit in the pre-qualification stage and will not do a hard pull (the kind that dings your credit score) unless you accept the loan offer.
Franchises are consistently vulnerable to cash flow issues thanks to the many mandatory expenses they face all throughout the year. On top of operational expenses and growth-related investments, franchises must obey the fee guidelines of their parent company, or “Franchisor.” Royalty and advertising fees are deducted from weekly or monthly sales. Some franchise owners must pay for new employees to undergo special training programs. Certain upgrades might be required for specific dates, and the national marketing campaigns that come from the aforementioned deduction must usually be supplemented by local advertising.
You can arrange to borrow from ordinary commercial banks or credit unions for your new venture. According to the Small Business Administration (SBA), new franchise owners have a higher tendency to borrow from commercial banks than new business owners. Lenders prefer advancing cash to new franchises over other new businesses since they already have trust in the brand and business model of the business being funded.
Government small business loans help put your own business within reach. First there’s the quest for a decent location, then comes building a customer base, followed by all the initial hiccups of generating a cash flow before your business grows roots and gains momentum. The beginning of a business is crucial because it’s when you gain or lose market credibility. If you disappoint your customers, they may not give you a second chance. If your business gets off to a rocky start (most do), and you believe you can recover but need further financing to make this happen, you can apply for government small business loans.