Written by : Jeff Elgin
As traditional funding sources dry up, franchisees have to get creative. Fortunately, reliable strategies aren't being kept secret.
It's been said many times, "Necessity is the mother of invention." The credit crisis has made funding a new franchise much more difficult, but you needn't give up hope. If you research your options and explore the new programs being offered by some franchise companies, it's possible to find innovative approaches that can help solve this issue--even in today's market.
The fact is that franchise companies still want to grow; and many individuals are still chasing the American Dream. Both groups realize that the lack of available credit is hampering their ability to make this happen. Solutions exist, but they often require some out-of-the-box thinking and aggressive efforts on everyone's part.
Some franchises are taking a proactive approach by developing nontraditional funding for new and existing franchisees to use while they're waiting for the market to rebound. In addition, many prospective franchisees are taking an alternate approach to find a solution for their own funding needs by using assets and sources they might not have considered in the past.
These efforts have created a number of alternative funding options or strategies, five of which you should think about:
- Direct financing: Some franchise companies now provide direct financing to their franchisees. This often takes the form of accepting a promissory note for part or all of the initial franchise fees owed. But it can also involve more extensive lending if the franchisor is financially strong enough to provide such a program. These types of programs are rare but becoming more common. Be sure to ask any franchise company if any such direct financing plans are available now or contemplated for the near future.
- Third-party lenders: Other franchise companies have arranged indirect financing or leasing programs for their franchisees with third-party lending vendors. In some cases, such programs require the franchise company's guarantee (something they normally wouldn't do); but if that's what it takes, then many are agreeing in the current climate. This is another potential funding area that prospective franchisees should explore.
- Angel investors: Still other franchise companies are exploring angel investor programs to attract additional funding sources. These sources are individual or corporate investors looking for upside potential to increase their returns. These types of loans typically require an equity participation "kicker" as part of the overall package. Though such a provision may end up making the loan more expensive, it may be the only viable option available to the prospective franchisee. This is also an approach a prospective franchisee may pursue if his franchise company hasn't.
- Low-cost franchises: Individually, one of the strategies that many are using right now is to focus on lower investment franchises. There are many service or B2B franchises available with a lower initial investment than the typical retail or fixed-location startup. If you can find a franchise that meets your income goals and needs for less than $100,000, then you may be able to fund the investment completely from available cash, thus avoiding the need for sourcing any additional funding.
- Savings: Other prospective franchisees are accessing their retirement plan dollars to invest in their franchise. Especially given the stock market performance over the past year and the lack of confidence that many feel about its potential in the next few years, investing these dollars into a business that's under your own control has more appeal than ever. This strategy uses a self-directed IRA and carries a big caveat: any such program be set up with all of the correct legal and IRS requirements. There are specialists who can assist you in setting up this type of program; you need to have such competent assistance to make sure it's done properly.
Though these ideas stray from the traditional lender source programs that prospective franchisees have relied on in the past, they're reliable tactics to get a cash advance. Those standard programs will certainly come back as the credit availability cycle stabilizes, but if you want to pursue financing in the meantime, you may have to get more creative.