Although not considered a traditional source of financing for franchisees, many franchisors provide financing. During the current recession many franchisors are finding ways to offer a financial boost to new franchisees. Here is some timely information pertaining to franchisor financing.
The first step in identifying whether a franchisor provides financing is to review the Franchise Disclosure Document (FDD) and in particular Item 10. This section of the FDD deals with franchisor financing. Another approach is to simply ask the franchise sales person if the franchisor provides financing.
Following are examples of financing that franchisors provide:
A significant number of franchisors provide financing either directly or through third parties. In the many cases this financing is for equipment packages or real estate for the franchise location. There are franchisors that will hold the prime lease and develop the location. The franchisee will then sign a sub-lease with the franchisor that includes the basic rent plus leasehold improvements. This arrangement unburdens the franchisee from having to obtain the additional working capital for purchasing the land and/or developing the site.
Another example of franchisor financing is for the equipment package that could be leased from the franchisor directly or from a leasing company that the franchisor works with. Once again leasing the equipment is a source of funding for the franchisee.
In the majority of cases, these types of arrangements are usually found in franchises that require a substantial investment, such as upwards of three hundred thousand dollars. Most often found in the restaurant or hospitality industries.
Franchisors Financing the Purchase of the Franchise
There are franchisor’s that provide direct financing through the use of a promissory note. The note and its terms must be disclosed in the Franchise Disclosure Document. The note may be used to finance a portion of the franchise fee or starting inventory that is purchased from the franchisor.
A more recent practice by franchisors to emerge during the recent economic recession has been to discount the initial franchise fee. This approach appears to be increasing in popularity as franchisors are looking to assist individuals purchase their franchise.
In the event a franchisor doesn’t provide financing on a direct basis they may be able to assist their franchisees in obtaining 3rd party financing.
Other Franchisor Financing Options
There are some franchisors willing to provide a form of financing on a limited basis to an individual with impressive credentials. Having operated several franchise companies I’ve encountered a number of franchise candidates with the talent, experience and desire for a particular franchise who didn’t have access to the required capital. In certain instances I found a way to accommodate their financial needs. One of the tools we used included funding part of the franchise fee. I later included this feature in our franchise disclosure document. Had some of these individuals not impressed me and my management team with their credentials we would not assisted them. If you present yourself as a strong candidate to the franchisor but with limited funding you may be pleasantly surprised by the response of the franchisor.
Franchisors who seek funding for their new franchise may be able to obtain financing from the franchisor. Be sure to check the FDD under Item 10 and compare the cost to franchisor financing to other sources.