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Franchising can offer a potential business owner a system that typically has a proven history of success in a particular industry. The franchise business system
is a defined way of doing business for a particular franchise concept. If the system is followed by the franchisee (franchise business owner), the franchisee should expect similar results that the other franchise locations are experiencing, subject to local market conditions and location, of course.
Franchising helps to remove some of the “trial and error” learning, that a business owner will experience in starting and owning a business. Key areas of a business that a franchisor may support are:(1) site selection (2) equipment/inventory purchasing (3) selection/training of staff (4) marketing (5) owner management oversight and (6) record keeping.
An important consideration for the potential franchisee is how to finance the franchise.For some franchises, the amount required to start the franchise may be small enough that the owner can finance the start-up out of personal cash resources. These resources would include cash and savings, retirement funds, stock or home equity.
For the franchisee in need of a substantial investment to start a franchise, an SBA guaranteed loan could be the best solution.
An SBA 7a loan is a loan that is originated through a bank, a non-bank lender or a credit union that participates in the U.S. Small Business Administration’s 7a loan program.
In exchange for an SBA guaranty of 75% to 85% (dependent on loan size), the SBA lender is willing to grant an SBA 7a loan based on a lower equity injection and a longer amortization.These improved loan terms will allow the franchise owner to preserve working capital.
An SBA 7a loan can provide the borrower with credit terms that are not available elsewhere in the market place.
The terms available with an SBA 7a loan can help to preserve both the cash flow of the business and back-up working capital of the owner.
Conventional bank loan terms are typically on shorter amortizations and require a higher equity injection for a start-up franchise business.
A short loan amortization (36 months or less) could result in a higher monthly payment and restrict the amount of cash flow available for the daily operations of the business. A large equity injection would reduce the loan amount and the monthly loan payment. However, the higher equity injection would reduce the amount of back up liquidity that the business owner has available. The franchise owner might consider the need to retain some of these funds for unanticipated personal needs or to support the cash flow needs of the franchise business.
When the franchisee experiences a business “bump in the road” in the life of their franchise, they will realize the value of preserving the business cash flow through a lower loan payment (thru a longer amortization) and the security of having back-up liquidity available to them (thru a lower equity injection). At that time, they will be glad that they chose an SBA 7a loan to support the preservation of their cash flow and the back-up working capital available for their franchise business. This is the 1st in a series of articles on SBA lending for franchise businesses.