Nearly 11,000 new U.S. franchise units opened their doors last year, the first gains the sector has seen since 2008, according to the International Franchise Association (IFA). But the industry--which now comprises more than 747,000 units, up 1.5 percent from 2011--remains in recovery mode. "We still have an 18 percent lending shortfall in the franchise industry," says IFA president and CEO Steve Caldeira.
Franchisors aren't taking the continued credit crunch lying down. Many, such as Meineke, Gold's Gym and The UPS Store, now offer financing programs of their own to first-time and multistore franchise owners who qualify. We spoke with Caldeira about these programs and what hopeful franchisees should know about them.
How many franchisors offer programs like this?
There are probably at least 75 to 100 franchisors right now working on innovative, creative solutions to help both existing and prospective franchisees get into business or expand their business. And I would say that number will continue to increase.
And then you throw in the companies that are stepping up to help the franchise industry get more financing. These are companies that have high visibility, high respect and are increasingly becoming more entrenched in the lending aspect of the franchising industry.
Look at Franchise America Finance. They provide custom lending solutions for franchisees in very reputable franchise systems. They're working with 25 brands in the industry. The UPS Store is one, and Fastsigns, Popeyes, Jersey Mike's and so forth. You've [also] got companies like BoeFly, which harnesses the power of the internet to make franchise access to credit easy, efficient, turnkey. BoeFly matches borrowers and lenders, a lot like Match.com does for people. You've got over 100 franchisors that rely on BoeFly to help franchisees secure financing.
"There is something here for everyone, and there are increasingly more resources available for financing." --Steve Caldeira, IFA
What tips can you offer 'treps about franchisor financing?
First and foremost, do your research and due diligence. Take a close look at the Franchise Disclosure Document, which is required by the Federal Trade Commission. Really try to understand everything you can about the franchise system you may be interested in. Speak to existing franchisees about that brand. Is the brand sound? Do they have a good track record?
Second, truly understand what the financial responsibilities are going to be. Is there real estate involved? When can you expect to turn a profit? What kind of effort goes into being a great franchisee?
Then speak to some of the customers of these [third-party financing] companies. What is their experience? How did their rates and terms compare with those of other companies, SBA-approved banks, commercial lenders, etc.? Try to identify the best deal that fits your particular needs.
How much down payment and collateral do these loans require?
It varies depending on the brand. And the size of the deal might reflect a different percentage that you may have to put down--it is one thing to do a one-store deal and another to do a 10- or 15-store deal. You could have an initial franchise fee and total investment of, say, $5,000, all the way up to several million dollars, depending on what the brand is. You have to look at each situation on its own merit.
Any other considerations, financial or otherwise?
Obviously, you have to have good credit. But at the end of the day, have a passion for what you do. There is something here for everyone, and there are increasingly more resources available for financing, especially if you are trying to align yourself with a proven brand that shows a great track record of growth and franchisee satisfaction.
Here's a sampling of IFA members that have stepped up to help qualified 'treps get in the franchising game or expand their businesses.
Custom swag retailer offers financing at zero-percent interest for two years.
raised $5 million in private equity funding to help franchisees with down payments. Hurricane Grill & Wings raised $10 million toward financing for new and existing franchisees.
Auto body repair and paint franchisor offers lower license fees and reduced royalties for multistore operators.
opened a new financing arm to help would-be and existing franchisees secure funding.
has partnered with Franchise America Finance to help franchisees secure loans.
Service-based franchisor The Dwyer Group finances up to 80 percent of its franchise fee for up to eight years.
will take a minority stake in restaurants developed by multi-unit franchisees. The company has set aside $5 million for the program.
Through its Green Associate Assistance Program, will apply up to $10,000 of its initial franchise fee toward startup expenses for candidates who own or are employed by green-industry businesses.