If you are considering or have already decided to start a small business franchise, you may be wondering what the next steps are to get your small business up and running. While there are quite a few things needed for your small business such as a good business strategy, well thought-out business plan and possibly a team of partners and employees, the biggest obstacle you'll most likely face will be financing. There are quite a few ways to finance a small business including small business loans, groups of investors or even financing directly through the franchisor, and while each option will get you to the same end result of opening your small business franchise, it's important to weigh the pros and cons of each form of financing. With that said, let's take a more in depth look at a few of the most popular ways to find financing for your small business franchise.
Assuming you don't have hundreds of thousands of dollars tucked away somewhere that you're going to use to start your franchise, a small business loan is going to be the most common form of financing for your franchise. The good news about getting a loan from a bank is that most banks and lenders will be more willing to award loans to small business franchises than to other types of small businesses simply because facts show that small business franchises are more likely to succeed. While there are no guarantees in any business, statistics have shown that over the course of ten years, non-franchise small business opportunities see a paltry success rate of less than 20% while small business franchises succeed 92% of the time. Banks and lenders are all about numbers and statistics, so seeing success rates like these will not only help you get a loan even if you have been turned down for a traditional small business loan, but you may also be able to negotiate a lower interest rate or a higher initial amount on your loan if it's for a well established franchise.
A great alternative to getting a small business loan from a bank or lender is to put together a team of investors to raise the initial capital needed to start your small business franchise. This could be just one person or a team of ten or twenty people, but either way you'll need to be aware of a few of the pros and cons of having investors. Depending on how you structure your business proposal, your investors will get a percentage of the profits that the business makes and potentially a percentage of the gross income whether your company makes money or not. Essentially, your investors can be thought of as partners or shareholders. In the typical investor situation, your investors will take a high percentage of the profits until they recoup their investment and then will continue to earn money (although it will be a smaller percentage) indefinitely, assuming the business continues to make money.
An example of this model working well would be if you and a few friends or relatives went in on the business together and plan to all contribute time and money to the business. If you are the type of person that wants total control of the business and you don't like the idea of sharing your profits with your investors, then the investor model probably won't work well for you. If you do choose to go with a group of investors, make sure that you carefully construct your business proposal so that it protects you and your business financially. You want your investors to be able to make money off of the business, but you don't want the business to suffer financially or have cash-flow problems because you've agreed to pay your investors a set amount each month despite the success or lack thereof of the business.
Finally, a third option that is becoming more and more prevalent with small business franchises is direct financing from the franchisor. Not all franchisors offer this type of financing, but many larger franchisors are beginning to see the benefit it brings to them and to their franchisees. The basic protocol here is that the franchisor would evaluate the franchisee's (that's you) credit and consider a few other factors and then make the decision to finance. From there, you would receive the money to cover the franchise fee and all of your startup costs plus you would have the option to negotiate more money to cover the first few months operating expenses. This benefits the franchisor because it allows them to sell franchises to more people and they not only make money from the franchise fee, but they will also make money from the interest paid by the franchisee each month.
The benefit it provides for the franchisee is that this is often one of the easiest ways to get financing for your franchise and the franchise will also be able to give you a much more accurate financial picture than the bank would be able to give of what's required to own and operate their specific franchise. Bear in mind that interest rates will vary depending on the franchisor, so while in many cases it will make sense to go with direct financing, with certain franchisors, you'll spend more money in the long run than you would with a bank loan by financing with the franchisor directly.
Hopefully you've gotten a good idea of the financing options available for small business franchises, but if you still have questions, or if you'd like to get some more in depth information, consider a call to FranChoice. FranChoice is a consulting company designed to take even the greenest of entrepreneurs, show them which franchise will work best for them and teach them all the intricate details of franchising. FranChoice not only helps prospective franchisors figure out the details, but also has it's own group of consulting franchises, so whether you need some info on franchising or if you'd like to start your own FranChoice consulting franchise and help others get franchise info, FranChoice could be a great choice for you and your new small business franchise.