Thursday, March 31, 2011

In Search of Funding



The greatest hurdle for the inspiring franchise-owner-to-be to overcome on their quest to become their own boss is business financing. One might think that a proven business concept, solid business plan, liquid funds amounting to 20% of start-up investment, and a great credit score is all you need, right? Well, not necessarily the case in today's lending world as many hopeful entrepreneurs have painfully discovered.

There is no magic formula, but there are ways to secure funds. Here are a few of the options and my personal experience with each:

1- Angel Investors and Venture Capital

If you can find an Angel Investor who has a passionate for the business concept, sees the potential and believes in you as the owner/operator, this might be your best option. Typically an Angel is fairly risk tolerant, has a longer term view of payback (4+ yrs), and willing to invest smaller amounts (under $1m). You may have to give up an ownership share in your company, but often the Angel will agree to loaning the cash for a competitive interest rate. For a single unit retail franchise, Venture Capitalists are not really going to be interested as the investment level would be too low. Furthermore, a VC typically will want a stake in the company and will require their active participation in the management of the business.

2- SBA Loan Programs

Government-backed SBA loans are often the only option an individual might have to secure a loan from a bank. There is some misunderstanding by many about what the SBA qualification requirements are for the prospective business owner. Actually, the SBA (government) requirements are fairly limited compared to the requirements imposed by the specific lender itself. In general, to qualify for an SBA loan under most banks' requirements, an individual will need:

a) a high credit score,
b) ownership or work experience in the same industry as the new business,
c) strong business plan showing ability to repay loan,
d) personal assets to use as collateral,
e) cash infusion of 20% or more, and
f) secondary income source (ie. spouse).

There is a significant amount of documentation and paperwork that will come with the loan application and it will take at least 60 days to get to a point of approval. Also, don't be fooled when the banker gives you thumbs up on the first visit and saying you are "pre-approved". All this means is they like the idea of loaning your business money and your credit is good....not that you are in any way approved for the SBA loan. This approval is typically out of the local bankers hands.

If a specific bank declines you SBA loan application, do not get discouraged. I recommend that people go to 3-4 banks at the same time so they don't lose time. I know of cases where the franchise prospect was declined by 6 banks and the 7th gave them the loan. Goes to show, determination and persistence pays off!

Banks will also look to the Franchise Registry to see if a franchise is "approved" by the SBA. If not on the Registry, most banks will stop the process at that point. The SBA requires certain flexibility provisions in the franchise contract for the business which allow the owner to make the right decisions to run the business profitably. The approval and inclusion on the Franchise Registry ensures the bank that the franchise in question is meeting these requirements based on an independent review of the FDD. Oil & Vinegar is approved and listed on the Registry.


3- Commercial Bank Loans

A standard Commercial loan, secured by the business assets, are typically not offered for new business start-ups and specifically franchises. However, for individuals with strong credit scores, a second source of income (ie. from spouse), and personal assets to put up as collateral, a secured loan could be a viable option. No equity share will need to be handed over, but the cost of servicing the debt will significantly cut into profits of the business and strain cash flow in the initial years. Most banks will also look for a sizable cash infusion from the owner (potentially 50% or more).

4- Home Equity Loans

For those who purchased their house a number of years ago and actually still have some real equity built up, this could be an interesting source of funding. Of late, banks are very conservative in the valuation of real estate, so what you think your house is worth and in turn the equity is, might well be miles away from what the bank is willing to accept as collateral value.


5- 401k Financing (ROBS)

I often here prospects say that tapping into their 401(k) or IRA savings is the last resort, but given the tightening in the financial markets, many are indeed investing their retirement funds in "themselves". This can be done through a vehicle commonly known as Rollover as Business Start-ups (ROBS), which enables entrepreneurs to use their 401(k) or IRA funds to invest in a franchise without taking a taxable distribution or getting a loan.

ROBS are becoming more commonly known and accepted as a proven small business financing option. FranData estimates that in 2010, more than 4,000 individuals successfully acquired a franchise as a legitimate 401(k) investment. Industry experts estimate that since 2005, more than 10,000 small business start-ups have been capitalized in this manner. The firm that most entrepreneurs rely on to support them in setting up and administering a ROBS transaction is Guidant Financial, who is considered the leader in the specific financing segment.

This form of funding is not for everyone, but is the ultimate way to put your financial future in your own hands. We have current franchisees who have used Guidant's iFinance program to start their business. Here is how it works....


Guidant's goal is to ensure the funding process of their clients business or franchise is as simple and beneficial as possible. The following describes the steps that Guidant takes to roll existing funds into a new business or franchise - but their
representatives will be handling almost all of the legwork.


STEP 1 | Form a Corporation
Guidant will form this corporation or work with your attorney during the formation process.

STEP 2 | Corporation Sponsors a 401(k) Plan
Guidant's unique 401(k) Plan has been designed to allow for investment into your corporation. The 401(k) Plan comes complete with a favorable determination letter from the IRS at no additional charge.

STEP 3 | Rollover to new 401(k) Plan
Guidant will help you through the process of moving your retirement funds from your previous employer or IRA into the new Guidant 401(k) Plan.

STEP 4 | 401(k) Plan Invests in the Corporation
Your new 401(k) Plan purchases stock in the corporation. This 401(k) Plan now holds stock in the corporation and the business is debt-free and cash-rich from the sale of the stock. At this point, the corporation will now be able to purchase your new business or franchise.


In the end, there are ways to realize your dreams and get beyond the hurdle of obtaining financing and each individual situation will likely dictate the options that are available. But, the money is available for those willing to do what it takes to go find it.

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