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How And Where To Get Money For A Franchise Idea
How often have you thumbed through a business opportunity magazine,
noticed a franchise opportunity advertisement, and felt you'd really like to get in on
that...if only you had the money? If you're like most who are seeking greater opportunity
and wealth, this probably happens with you more often than you care to admit, except
perhaps in strictly private conversations.
When the average person sees one of these opportunities, or comes up
with a similar idea of his own, the problems of start-up capital may seem formidable. But
in reality, they may not be. In fact, just about anyone with a good credit record and an
"insider's sense of business" can get the capital he or she needs, whenever it's
needed. The secret is in knowing how to put together a proper proposal, and to present it
to the right per son. These are the "how-to" instructions we're going to give
you in this report.
The first thing you're going to need is a complete business plan. This
is a complete and detailed description of exactly how you intend to operate the proposed
business. Your business plan should detail precisely the product or products you plan to
sell; how you're going to produce or manufacture the product; your costs (inventory costs
if you're purchasing them from a supplier); who is going to sell those products for you;
how they're going to be sold; the attendant costs; when you expect to recoup your initial
investment; your plans for growth or expansion; and the total dollar amount you're going
to need to make it all work according to your plan. Your business plan must be detailed -
complete with projected income and expense figures - through at least the first three
years of business. For more details, and "how-to" instructions, see our re port,
HOW TO PREPARE A PROF IT ABLE BUSINESS PLAN, report #3503.
Now, assuming you have your business plan all
worked out, put together and ready for presentation with your request for capital, let's
talk about your capitalization proposal.
First, keep in mind that whenever you ask somebody for money, whether
it's for a small personal loan or a large amount of money to finance a business, you're
involved in a selling situation. You have to prepare a "sales presentation" just
as if you were getting ready to sell an automobile or refrigerator. Within this sales
presentation you must have all the facts and figures; you must anticipate the questions
and the possible objections of the prospective lender with answers or explanations; and
you must "package" it as impressively as you would yourself for an audience with
the president of IBM or General Motors.
The more money you ask for, the more "in-the-know" will be
the people you want to borrow from, and so the more detailed and organized your proposal
must be. This shouldn't cause you too much worry however, because you can hire a CPA to
help you put it together properly, once you've got the facts and have a business plan he
can work from.
Look at it this way: The more money you request for your business, the
more your lenders or prospective investors are going to want to know about you, your
planning, and your business. They want to be impressed with the fact that you've done your
homework; they want to see that you've researched everything and documented your facts and
figures; they want to be assured by your presentation that investing in your business will
make money for them. It's just that simple at the bottom line. Unless you can instill
confidence in them with your business plan and loan or investment proposal, they're just
not going to give much positive thought to your request for capitalization.
So you'll need a balance sheet describing your net worth - the worth of
what you own compared to the amount of money you owe. You'll also have to prove your
stability and money-management talents relative to how successful you've been in paying
off past
obligations. If you have had credit problems in the past, get them "cleaned up",
or at least explained on your file at your local credit bureau office. Under the law,
credit bureaus are
required to give you all the information they have about you in their files, and it's your
right to correct any errors or enter explanations regarding negative reports on your
credit. Do this without fail because prospective lenders or investors will definitely
check your credit history.
So, now you have your balance sheet prepared; your credit history
organized in a light that's favorable to you; your business plan (with costs and income
projected over the coming three years), you're ready to start looking for lenders or
investors.
Almost all franchisers offer help in setting up with one of their
franchises. Most will go out of their way to assist you in getting the financing you need.
Some will lend you the entire amount, with payments coming out of the income they expect
you to make from their franchise operation. Many will carry this loan themselves, while
others will carry part of it and find you a lender to finance the remainder.
Franchisers have two objectives in mind when they offer franchises to
the public: They are trying to expand their operation, thus increasing their profit, and
they are trying to raise capital for themselves. Generally speaking, if you have a good
credit history, and if they feel you have the necessary business personality to achieve
success with one of their operations, they'll do everything within their power to get you
in a franchise outlet. Keep this in mind the next time you see an advertisement for a
promising franchise opportunity requiring a substantial amount of cash outlay. You don't
necessarily have to have all the money. They want you, and they'll help you!
Many people seem to be unaware that most of today's largest
corporations started on a shoestring - on borrowed money. Many people seem to feel that
unless they've got it all "in hand" in savings, then they'll just have to keep
plugging away until they can save up enough to take the big plunge. Nothing could be
farther from the truth. Just a quick bit of research will show that 999 out of every 1,000
businesses were begun on borrowed
money.
Look to your family and friends for financial help. Approach them in a
business-like manner; tell them about your idea or plans, and ask them for a loan. Agree
to sign a formal statement to pay them back in three, five or ten years, with interest.
When you have your proposal assembled, you might even want to think of
a limited partnership or even a general partnership arrangement as a way to finance your
project. In any kind of partnership, each partner shares in the profits of the company,
but in a limited partnership, each person's loss liability is limited to the amount of
money he initially invested. The truth is, in this kind of a situation, you'll be doing
all the work and sharing your gain with your partners, but then it's a fairly sure way to
obtain needed financing.
Another common method of obtaining business financing is through second
mortgage loans on a home or existing piece of property. Say you purchased a home ten years
ago for $35,000, and today the assessed valuation is $85,000, with a mortgage of $25,000
still outstanding. A lender may consider your home to be security or collateral for a loan
up to $60,000. In many instances, this is the easiest and surest way of getting the money
needed for franchise or other business investment. And, it makes sense; you've got
"net worth" available that is doing nothing but sitting there. Take this equity
and invest it in a worthwhile business, and you could double or triple your net worth each
year
for the rest of your life.
Deciding to obtain a second mortgage on your home in order to finance a
business opportunity is without doubt a major decision, but if you are sure about your
investment project, and are determined to succeed, you owe it to yourself to go ahead. You
could incorporate yourself, borrow money from your family through a second mortgage on
your home, and protect against the loss of your home through the Federal Home stead Act.
The important point here is that all business opportunities involve risk and sacrifice.
It's up to you to determine the feasibility of your success with your proposed venture,
then decide on the best way possible to proceed.
In every instance where you run into reluctance on the part of a lender
to lend you the money you need, explore the feasibility of "two-name" or
"co-signed" loans. You can have the franchiser sign with you, or one of your
suppliers, a business associate or even a friend. Oftentimes you can borrow or rent
collateral such as stocks, bonds, time certificates, business equipment or real estate,
and in this way give greater confidence to the lender in you r abilities to repay the
loan. Whenever you can show a contract from someone who has agreed to purchase a certain
number of your products or services over a specified period of time, you have another
important piece of paper that most lenders will accept as collateral. Still an other
possibility might be to get a bank or a firm that has loaned you money in the past to
guarantee your loan. They simply guarantee that they'll lend you money in the future if
ever the need should arise.
Going straight to you neighborhood bank, applying for a business loan
and walking out with the money is just about the most unlikely of all your possibilities.
Banks want to lend money, and they must lend money in order to stay in business, but most
banks are notoriously conservative and extremely reluctant to lend you money unless you
have a "regular income" that "guarantees" repayment. If and when you
approach a bank for a business loan, you'll need all your papers in order - your financial
statement, your business plan, credit history and all the endorsements you can get
relative to your succeeding with your planned enterprise. In addition, it would be a good
idea to take along your accountant just to assure the banker that your plan is verifiable.
In the end, you'll find that it all boils down to whether or not the bank officer studying
your application is sold on you as a good credit risk. Thus you must impress the banker -
not only with your proposal, but with your appearance and personality as well. In dealing
with bankers, never show an attitude of doubt or apology. Always be positive and sure of
yourself. However, don't come on so strong to them that you're either demanding or
overbearing. Just look good, know your stuff, and project an attitude of determination to
succeed.
Your best bet, in attempting to get a business loan from a bank, is to
deal with commercial banks. These are the banks that specialize in investment loans for
going businesses, real estate construction, and even venture programs. Look in the yellow
pages of your telephone or business directories; call and ask for an appointment with the
manager; and then explore with him the possibilities of a loan for your project. One of
the "nice things" about commercial banks is that even though they may not be
able to approve a loan for your business ideas, they will almost always give you a list of
names of business people who might be interested in looking over your proposal for
investment purposes. A lot of commercial banks stage investment lectures and seminars for
the general public. If you find one that does, attend. You'll meet a lot of local business
people, some of whom may be able to and interested in helping you with your business
plans.
When you're looking for money to move on a business deal, it does not
really matter where the money comes from, or how it all comes about. It's important that
you get the money, and at terms that are suitable to you. Thus, don't overlook the
possibilities of an advertisement for a lender or investor in your local papers. Place
your ad as well in national publications reaching people looking for investments. Other
avenues to seriously consider are foundations that offer grants, local dental and medical
investment groups, legal investment groups, business associations, trust companies and
other groups or organizations looking for tax shelters.
Basically, it isn't a good idea to go to a finance company or other
commercial lender of this type for a business loan. The most obvious reason is the high
interest rates you have to pay. These companies borrow money from larger money lenders,
and then turn around and lend it to you at a higher interest rate than they pay. Herein
lies the means by which they make money from granting loans to you. The more it costs them
to provide the money for you, the more it's going to cost you to borrow their money. The
only element in your favor when borrowing from one of these agencies is that most will
generally lend you money against collateral other lenders just won't accept. Insurance
companies, pension funds, and commercial paper houses are not too out of sight with their
interest rates, but they generally will not even consider talking to you unless you're
requesting $500,000 or more. They'll also pretty much require that your business proposal
be backed by the best possible plan.
Finally, the bottom line is this: You must have a well-researched and
detailed business plan; you must have all your documents and projections put together in
an impressive presentation; and then, you will have to be the one who does the final
selling of your proposal to the investor or lender. This means your appearance,
personality and attitude, because - make no mistake about it - before anyone lends you any
size able amount of money, they're going to want to take a close look at you personally
before they hand over the money.
Actually, the different ways of financing a franchise opportunity are
as many and varied as your own creativity. The sources of obtaining money are virtually
limitless, and available to anyone with an idea.
One word of caution before you jump into any franchise purchase
agreement: The price you pay to participate in a franchise operation is not always the
total cost involved in getting the business off the ground. With some franchise
operations, you may find other costs such as down payments on the purchase of property,
building construction costs, remodeling or site improvements, equipment, fixtures, signs,
advertising, and training. Virtually all franchise deals require that in addition to the
purchase price or the license fee of the franchise, you're required to give a certain
percentage of your gross business income to the franchiser, plus extra payments for
promotion and administrative costs. Above all else, before you get involved in a
franchise, or any business venture for that matter, make sure you've conducted a complete
and thorough investigation of the opportunity presented. If it's a good deal, then go with
it; but if you have any doubts or feel as though you're getting in over your head, back
off and look around for something not quite so ambitious, or perhaps expensive.
There are a lot of good franchise opportunities, and some not so good.
It's important that you be sure of what you're investing in, and that you can make money
with it. From there, preparing the proper business plan and the necessary financing, while
not always a snap, can be done. Now's the time to do it! We wish you outstanding success
with your franchise business.
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