Franchise Financing for Food Related Businesses 3 major Myths.
Our firm gets a lot of inquires about purchasing and financing a franchise with a small business loans, or government guaranteed loan. Most of them relate to food franchises, most well-known and some less well known. Overall this is a very difficult topic to explore because most people after attending a franchise show, or after hearing a pitch by franchise owners and/or promoters, hear things that do not really exist on the market. Such as easy financing plans available. Or financing with very little or next to nothing money down and so on and so forth. This article is prepared in order to give our readers, clients and future clients a general overview on 3 major myths advertised during franchise shows. We have a lot of questions when going through small business loan program with most of our franchise financing clients.
Myth 1: Small Business Loan can finance franchise purchase in most cases.
Generally this is myth is really false. Most Small business loans programs are guaranteed by the government and are very strictly regulated. Statistics show that 80% of the food related start-ups shut down during the first 2 years of operations. Banks don’t want to lose money left and right, especially knowing that a small business loans program doesn’t have a unlimited government guarantee but quite limited one. We suggest checking with a specialist about possibility of financing a franchise through a small business loan program prior to spending any serious time and effort into it. The easiest way is to check if the franchise has any institutional financing packages available. Find out the basic requirements both on cash up front, credit and net worth of the applicant. This would be a good start.
Myth 2: Small Business Loan can finance most franchises with little or 0 money down.
This is absolute false. Most small business loan programs for franchises finance up to 50% of franchise costs (no inventory or operating requirements are financed at all). That means if start-up costs are $400k, the minimum the applicant should have is $200k + operating requirements for the time until break zero/even and profit is obtained. The second number in the equation could be very different from franchise to franchise, and also from location to location. Therefore when someone tells our client that they can quit their job, purchase and open a franchise with no money down, we normally suggest our client not to speak to that person again. It’s asking for trouble.
Myth 3: Franchise business model is the most efficient business model on the market.
This could be true in some cases but there are pros and cons. Most national brand franchises that we could help financing using small business loans program indeed have very efficient operations. This is due to large volume of orders they can save on food costs and have large rebates. Due to a large number of locations, national advertising programs are thrown left and right, promoting your business together with corporate locations as well as other owner’s locations. There are a number of exclusive service providers that as franchise owner you can use that are discounted specifically for your franchise.
But there is always pros and cons. Franchise agreements are very heavy and generally leave very little rights to you as the owner and operator. If for any reason you are not satisfied with quality of products delivered by your supplier, switching the supplier will be almost next to impossible. Also very often franchise owners have great ideas how to customize their location to the specific geographic area and different ethnicities living nearby. This type of customization is almost impossible in most franchise agreements. Also most franchises are not allowed to have separate phone numbers for their locations for direct order or pick-ups. Some might say it ads to efficiency but also ads to inconvenience as well. It is very difficult to build recurring clientele in your area because there is no personal relationship between you as an owner and your client – your major consumer.
There are many other pros and cons in franchising and when it comes to financing your franchise with a small business loan, allow professionals to handle it.
Call us and start right from the first try.