FranFund Offers Solutions to Simplify the Funding Process for Emerging Franchise Brands
The franchise industry continues to grow at a record pace. One out of every eight jobs in the country is related to franchising. One prevalent trend is the growth of emerging franchise brands. What is an emerging franchise? A generally accepted definition of an emerging franchise brand is a system with under 50-75 operating units, and a micro-emerging brand has under 12 units. Emerging franchise brands are more common than ever. Over 40% of brands that offer franchises in the United States began awarding franchising within the last five years.
While funding emerging brands may present unique challenges, FranFund‘s team of experts (above) has the expertise to simplify the process for both emerging and established brands. FranFund has helped countless entrepreneurs fund their dreams of owning a franchise regardless of the industry, sector, or location.
The first 20 franchisees of a new system will establish
a reputation for your brand in the lending community.
The franchisor of an emerging brand would be wise to consider a few crucial points relative to funding that will impact future franchisees’ ability to obtain the funding they need. For example, we recommend the first 20 franchisees of a new system have a strong financial history and sufficient capital. Those franchisees will establish a reputation for your brand in the lending community. This reputation can go two ways: 1) You have 20 high-performing franchisees that validate well; or 2) You have franchisees within that 20 who default on their SBA loans. Lenders view a loan default as both the borrower’s and the franchisor’s responsibility. An oft-repeated phrase in the franchise industry is “businesses fail for a number of reasons, but being over-capitalized is not one of them.”
The funding solutions available to the potential franchisee of an emerging brand will depend on the total project cost. The total project cost (TPC) is the cost of the franchise fee, equipment, marketing, licensing, leases, etc., plus working capital. Emerging brands do not have the benefit of a regional or national reputation that would generate immediate lender interest. We need to bring a financially strong borrower to the table for an SBA loan to mitigate that issue. Put simply, if you do not have “strength of brand,” you need to bring that strength in the borrower.
Funding Strategies for Emerging Franchise Brands
Two of the most common capitalization strategies for buyers on an emerging brand are Rollover for Business Startup (ROBS) and Small Business Administration (SBA) loans. Other solutions for funding emerging brands may include:
• Signature loan (unsecured).
• Securities-backed loan.
• Equipment leasing
• HELOC (home equity loan
or line of credit).
Franchisees of emerging brands can use a combination of these as a complete funding strategy.
Utilizing a rollover program such as FranFund’s FranPlan® allows candidates to access their qualified retirement savings tax-deferred and penalty-free to invest in their business.
The IRS refers to this process as ROBS. Using this program, the franchisees invest their IRA or 401(k) from a previous employer into their new business. At the end of this transaction, the new company operating account has cash available for any legitimate business expense, and their new 401(k) has shares of stock equal to the initial investment.
As the business grows and prospers, the value of the stock grows. Using this option as the entire capitalization strategy means that the new franchisees open with little or no debt and therefore reach break-even sooner. However, you can also use this product paired with a business loan for the down payment. The IRS, however, does have strict guidelines regarding the execution and maintenance of the plan. FranFund offers the IRS-mandated Third-Party Administration (TPA) service to ensure IRS compliance.
The Small Business Administration (SBA) provides a guaranty to lenders to incentivize them to consider riskier loans. Generally speaking, lenders think all business start-ups and first-time business owners are risky. The lender’s No. 1 objective is to be comfortable with the borrower’s ability to repay the loan. The SBA program works with lenders to offer business loans for startup, acquisition, expansion, and working capital with values available up to $5 million.
At FranFund, we have developed a portfolio of SBA lenders across the country that understand the value proposition of the franchise industry and are interested in making franchise loans, including loans for emerging brands. Your funding partner’s role is to help prepare a loan package and shop the loan to our lending network to get your candidates the best rate and terms on their emerging franchise.
Franchise Funding Tools
Around the internet, your candidates may find interactive funding or preapproval tools that allow input of key information about assets, credit score, investments, available cash, etc., allowing them to calculate a funding amount for which they qualify. FranFund offers a tool for this. However, there can be tremendous variables these tools are unable to accommodate.
The most efficient, effective and accurate way to get an assessment and prequalification is to speak to an expert franchise funding consultant. It is advantageous to work with a funding partner such as FranFund, which uses a franchise-specific prequalification, has extensive expertise in the franchise industry with emerging brands, and has relationships with lenders who are comfortable working with an emerging brand franchise model.
For more information on funding emerging franchise brands, visit FranFund’s Business Funding Website.