Giving Franchisees a Financing Edge

Are you equipped to provide prospective franchisees with information on how to finance a franchise? Even better, are you able to offer them financing assistance? Most financing experts say that the best source of financing information remains the franchisor.

The growth of a franchise company often depends on how much you can do from the financing side for a franchisee who may be just getting started or who wants to expand. If you can't actually help with the financing, at least be prepared to discuss the options and lenders who have financed other franchisees and who understand the business concept.

Low interest rates over the past few years and the growth of home equity accounts have helped many entrepreneurs take the plunge into franchising. But with interest rates likely to increase in the coming months, more and more prospective franchisees will be looking for other ways to finance the dream of owning a business.
How Much Help Do You Provide

It is important, for example, to provide franchisees with guidance on what to expect when preparing a loan application. Do you offer assistance in preparing a business plan? Most lenders want to see a business plan that spells out the goals for the franchise's growth and profitability.

You also can help the prospective franchisee by making sure that the loan application demonstrates your good track record as an established franchise company with a strong management team.

Commercial lenders will want to know exactly how much capital is needed and how the capital will be allocated. The prospective franchisee must be able to show how he or she will service the debt. It also is a good idea to show a three-year projected cash-flow statement.

Lenders also want information on the background of the borrower such as education and business experience. The franchisee is responsible for putting together a financial statement and must be ready to divulge details on his creditworthiness. Other types of information lenders will want to see includes the amount of debt the prospective franchisee has, how often he borrows and whether he is good about paying bills. In addition, what will serve as collateral in case the franchisee is unable to meet the payments?

If the prospective franchisee is buying a franchise for the first time and has little or no business track record, the lender is likely to ask for more information and may be unwilling to approve a loan unless the borrower has a substantial amount of collateral to bring to the table. In this case, the franchisee may have to apply for a Small Business Administration-backed loan. Know where to send start-up franchisees.

Once a commercial loan is approved, do you feel your job is done on the financing side? It isn't, say experts. Provide the franchisee with guidance on what needs to be done to keep the cost of money in check. For example, the franchisee should periodically assess the banking relationship to make sure he is receiving the best rates and services available to a business of his size and industry.
Offering More Than Guidance

Some franchisors actually go the extra mile and as a result they reap benefits for doing so. The ServiceMaster Company makes borrowing money for a franchise a much easier process. It has an in-house financing program called SMAC (ServiceMaster Acceptance Company), which provides many financing programs in all areas of the ServiceMaster Clean family. SMAC offers a wide variety of affordable financing options with rates and repayment terms designed to help the franchisee.

The franchise license, initial supplies, and equipment range from $20,283 to $84,525 and 80 percent of these costs can be financed through SMAC. It is set up to cover the following costs: the initial purchase of franchise license and product/equipment package, a line of credit, equipment to expand, vehicles, computers, and acquisition of additional franchise licenses. The remaining 20 percent must come from the franchisee.

SMAC gives the franchisee up to seven years to pay off the loan, says Dinah Coopwood, a manager with ServiceMaster. Applicants who qualify for the loan program receive quick approval decisions and competitive interest rates and terms. A loan decision is made within two or three days, says Coopwood. In addition, the franchisees can receive attractive terms that include an interest free loan for the first three months and interest only payments for twelve months.

While SBA-backed loans are helpful and attractive to many franchisees just getting started, Coopwood says that there is often a lot of red tape involved with federal loan programs. "An in-house financing program like SMAC makes the lending process very efficient," she says.

The ServiceMaster Company is the corporate umbrella for a number of franchise companies including ServiceMaster Clean, Furniture Medic, Merry Maids and AmeriSpec to name a few. It provides outsourcing services for more than 10.5 million residential and commercial customers.

The services are provided through a network of over 5,400 company-owned and franchised service centers and business units.

Another franchisor that assists with the financing side of franchise development is the unisex hair care establishment known as The Lemon Tree. The franchisor will help finance up to one half of the initial franchise fee along with half the design, d√ącor and equipment package. Deena Yaris, owner of The Lemon Tree, has approximately 58 franchised salons in New York, New Jersey, Connecticut, and Pennsylvania, with plans to expand nationwide.

Giving prospective franchisees a helping hand with financing is bound to be beneficial and translates into increased profits for the franchisor. Says Coopwood: "Money helps grow a business and helps startups get off the ground." So it makes sense to make sure that your franchise package includes as much assistance as possible on the financing front.

Published: May 3rd, 2004

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