Monthly Archives: March 2010

Five Questions You Should Ask Franchisors About Financing; A Franchisor That Isn’t Involved In Financing Probably Isn’t Selling Franchises!

As you continue your search for a franchise to buy, one important aspect may be financing. Whether or not you get that financing may depend on your prospective franchisor! Of course, you’ve got to qualify for the financing, but today, franchisors can help expedite loan approvals for their prospective and existing franchisees. Unfortunately, only a few franchisors seem to understand the new role franchisors must play in franchise financing, so while you’re shopping for a franchise, you must now ask what the franchisor is doing to help line up financing. Lenders now expect franchisors to get involved in the lending process; a requirement that wasn’t the case just a couple of years ago.

Impressively, one franchisor has tackled this issue by appointing a senior executive to build relationships with lenders. John Teat is the managing director of franchise finance for Primrose Schools. I recently interviewed him for the Texas Franchise Leadership Tele-Forum. Here’s what he recommends that franchisors do. Find out how well your franchisor meets these criteria!

  1. Today, franchisor/lender relationships are absolutely critical. While it’s location, location, location in real estate, it’s relationship, relationship, relationship in franchise financing. It’s who you know, and the franchisor that doesn’t have a network of bank and lender relationships isn’t in a position to help franchisees get funding. . . . Who are the franchisor’s lenders?
  2. The franchisor should set up an initial meeting with the lender and plan to ask questions about the lender and the bank. Learn about the lender’s credit culture. What’s their “put thru” system like? Lenders are impressed by franchisors who want to know about their needs. . . . What can the franchisor tell you about lenders who will consider your application for funding?
  3. Franchisors must ask for the lender’s assistance. Create a team spirit with the lender and work collaboratively to put together a funding plan for your brand. Get the lender involved in your business! Invite the lender to your office; to your conferences. . . . Can the franchisor introduce you to lenders?
  4. Once the franchisor has a program in place with a lender, it’s important to send the lender only prospective franchisees and existing franchisees that meet the criteria for the program! The worst thing the franchisor can do now is to send the lender a candidate that doesn’t qualify. . . . What are the criteria for qualification? Has the franchisor explained them to you?
  5. Franchisors must stay on top of the “put thru” system with the lender. Remain involved. The lender will look to the franchisor for help. . . . What can you expect the franchisor to do to help facilitate this process for you?

Loan Or Lease? You May Need Both To Buy A Franchise; It’s Important To Know Your Options

Adapted from Help Your Banker Say Yes! What franchisors and franchisees need to know to get financing today, by John P. Hayes, Ph.D. with Geoff Seiber.

If you’re investing in a franchise that includes equipment, such as a POS system, or fryers and ovens for the kitchen, or if you need a vehicle, such as a van or panel truck, you may be well advised to lease rather than to take out a loan. Leasing equipment is the equivalent of “renting” the equipment, which means that you won’t take money from your working capital to buy the equipment. With a lease, you set up a monthly payment, and at the end of the lease you can acquire the equipment, or upgrade it and roll the package into another lease.

The advantages of a lease include:

  • Preserve your working capital. Nowadays it’s important to keep cash on hand rather than use it to buy items that could be leased.
  • Claim a tax benefit. Section 179 of the U.S. Internal Revenue Service Code allows you to write off a percentage of a monthly lease payment. The law frequently changes, so it’s important to consult with a tax advisor before claiming this benefit.
  • FICO requirements are usually lower for leasing.
  • There are no prepayment penalties.
  • You can choose the terms: 24 to 60 months.
  • If you’re “corporate worthy” (you’ve been in business at least five years) you may not have to sign a personal guarantee.
  • If you own an existing business and you’re opening a second unit of that business, you may be able to use the first business to guarantee the lease, and you won’t have to sign a personal guarantee.
  • Closing costs are minimal: almost always less than $500.

There are few disadvantages to a lease, although no one will argue that if you’ve got the money, and can afford to spend it, then it’s less expensive to buy products outright and save the interest. Few people are in that economic situation, however.

Securing a lease may be faster than securing a loan – especially if you’re leasing an equipment package, software, a POS system, or a vehicle that’s recommended by a franchisor that’s well known to the lender. But you will still need to provide personal financial information and provide a variety of documents to the lender.

Join This Coleman Webinar:
The New Normal For Franchise Financing

Wednesday, March 17, 2pm ET. Join Bob Coleman, John Hayes, Geoff Seiber and Bob Rodi to learn more about how you can get the funding you need now to buy a franchise. Register at Coleman Publishing.