You May Not Want Zero Down In-House Financing
Wait, why not? Sounds great. Here’s what franchise companies are up to.
Over the past 30 years I have seen franchisors offer various forms of financial support to new and existing franchisees.
The most simple levels of financial support often begin with some form of delayed costs.
I have seen franchisors delay when royalties will be paid or scale them up across a timeline to give a new franchisee more of the incoming revenue to grow the business in the market. This is a good benefit, but the franchisee still has to cover the start up costs. The royalty comes out of ongoing revenue so I would drop this in a category of benefits, not financing.
I have also seen franchise companies say that after signing they will carve out a portion of the franchise fee paid and devote it to marketing costs the franchisee has in their market. The franchisee would typically work with the franchise support team to target various forms of marketing that could drive traffic to their location. The costs would then be covered by the franchisor until the benefit is exhausted.
Again, that seems to be more of a benefit than it is financing.
The challenge with in-house financing is twofold. First, the franchisor is not a bank and they are not really set up with the people or systems to administer a loan department, loan approvals or potential collections. Secondly, newer brands may not have the financial reserves to pay for your start-up while covering the costs of their operations.
With those challenges in mind I would carve out two forms of financing.
The first is that we have seen franchisors finance a portion of the franchise fee, most commonly half, with new approvals. Given that their franchise fees tend to be in line with their competitors, I see this as a true financing of a portion of the costs.
While it may not be substantial in light of the total start-up costs, it is still a franchisor offering financing as a benefit to the franchisee.
More recently I have seen franchise companies partnering in some way with banks or funding companies to create financing programs that can be offered to the new franchisee directly by the franchise company.
For some time now this was more commonly equipment financing for franchise brands that require trucks, heavy equipment or industrial supplies. These equipment leases can be very beneficial because the funding is coming from a source that has worked with the franchisor to understand their business and equipment needs.
This makes it very different than a new franchisee going to their bank and trying to explain the need for a box truck or tree trimming equipment. Some of the technical requirements can be hard for bank staff to understand and the new franchisee is not always equipped with all the answers. This in-house equipment financing can be very beneficial for equipment intensive businesses.
We have even seen equipment leasing used in retail, gyms and more. In these cases it can finance the gym equipment as well as retail shelving, carpet, paint, graphics and much more.
While rare, I also see full financing offers for business start-ups being offered by franchise companies.
Most recently we had a franchise company come to us with a full new franchise financing package with “0% to 10% down payment loan” to cover costs up to $250,000. The program is at a fair market interest rate and a term that should work for the business. Interestingly it also does not require any personal collateral, this is pretty uncommon even with the SBA loans most new franchise borrowers use.
With some pretty reasonable qualifications, a new franchise owner can get into business with a very reasonable cash out of pocket. These loan approvals generally take one day, application is simple and they fund in about 1 week.
Here is how an insider sees this deal.
It is a robust equipment lease, not a loan, that covers most of your start up costs but not working capital. A franchisee will still have to bring a cash reserve of $75,000 to get approved and that money will have to cover things like rent, labor and advertising. This may be an advantageous program, but be careful with what you are presented and what you are being obliged to.
Of course, SBA loans and 401K rollovers offered by long standing providers in the franchise space are still outstanding options.
Your approach might include the equipment lease from the franchisor along with an SBA express loan for the working capital, with a modest down payment on the SBA loan and you keep most of your cash in the bank and have a fast start up with lower risk.
If you have any questions, I would be happy to help.
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George Knauf is a highly sought after, trusted advisor to many of the top franchise ownership groups in the world. With over 25 years of experience in both start-up and mature business franchise operations he is uniquely qualified to advise individuals that have dreamed of Building their own empires. Whether you have an existing portfolio or searching for your first franchise, he can help you to pursue your dreams. www.MyPerfectFranchise.com