Treasure Hunt

Is franchise financing within your grasp? Sure--if your aim is true.

This story appears in the January 1999 issue of Entrepreneur. Subscribe »

Got a taste for fast food? A drive to get into auto maintenance, repairs or rentals? Whatever your entrepreneurial passion, if you're ready to enter the world of franchising but lack the price of admission, your timing couldn't be better. Availability of funds is at a recent high, and interest rates are down.

Where can you find all that available money? Everywhere. From banks and brokers to friends and finance companies--the sources are endless. But don't rush to your neighborhood bank just yet. There's work to be done first--and you must finish reading this article. But where do you start once you're finished?

"Investigate SBA loans," advises Bob Neagle, general manager of franchise finance at Newcourt/AT&T Capital, a finance company based in Parsippany, New Jersey. "[Lenders] are more interested in working with a first-time operator," Neagle says, "when the loan is guaranteed by the Small Business Administration, which has terms and conditions free of conventional lending constraints."

The SBA's Michael Stamler agrees, pointing to the administration's "reduced equity injection, reduced collateral requirements and longer maturities, which decrease borrowers' monthly payments and thereby increase cash flow." The SBA, which guarantees repayment of 80 percent of loans provided to small-business borrowers by private lenders, approves a very high percentage of applications because most have been screened and approved by lenders, Stamler notes.

"But don't come to us for a loan," implores Stamler. "Go to SBA-certified commercial lenders--banks and loan companies." To find a certified lender, call your local SBA office or visit the SBA's Web site (

Like most lenders, the SBA usually requires loan applicants to submit a business plan. "We want to see if the idea works, if the proposal has been thought through, and if the borrower has the necessary experience to [run] the business successfully and repay the loan," Stamler adds. "We look primarily at projected cash flow; banks look primarily at collateral."

So if you're going to the bank for money, amass as much personal funding as possible first, urges business school professor Jerry White. "Ask friends, relatives, business associates and the franchisor for money. Do anything that will help guarantee the bank that the loan will be repaid [even if] the business fails."

White, director of the Carruth Institute at the Cox School of Owner-Managed Business at Southern Methodist University in Dallas, suggests, "There's no need to borrow the entire sum from a bank. Put together a package with help from family, friends and savings. Short of raising enough funds, you can guarantee the loan by pledging personal assets, such as real estate holdings, or have someone cosign the note."

Paul DeCeglie, author of the monthly column "Money Matters" in Entrepreneur's Business Start-Ups, is a former staff reporter for the Journal of Commerce and American Banker. He can be contacted at

Collective Effort

Teresa and David Pouppirt (29 and 32, respectively) of Gresham, Oregon, followed that advice after their loan application was rejected by numerous banks, among them Key Bank. "We filed for bankruptcy against Key Bank nearly 10 years ago," Teresa confesses, pointing to the likely reason for the couple's loan application rejection.

To assemble the $115,000 needed to purchase a Precision Tune Auto Care franchise, the couple called in all their resources. "[We] borrowed $25,000 from David's aunt, withdrew $10,000 from his pension fund, took a $15,000 second mortgage on our home, and borrowed the balance from Phoenix Leasing," says Teresa. She has only one tip for loan applicants: "After filing bankruptcy against a bank, don't apply there for a loan."

Jay Froman, owner of Business Capital Resources (BCR) in Clovis, California, has another tip, which was reiterated by lender after lender: Do your homework.

"If you're committing the major portion of your assets to a business, you need to fully understand what that business is about," says Froman. "Research the opportunity and the market. Ask pointed questions of the franchisor. Study the UFOC [Uniform Franchise Offering Circular]. Call other franchisees to learn about their experiences, their actual start-up costs, operating costs, income, and the support they're getting from the franchisor. Then call a lender or a broker, explain your situation and ask for guidance." (For more on researching a franchise, see "Now You're Cooking".)

Using a broker to arrange your loan, as Froman did for the Pouppirts, is one of several recommendations Loretta Dodson, senior area development specialist at Precision Tune headquarters in Leesburg, Virginia, makes to franchisees. "Brokers can steer new franchisees in the right direction for their situation, recommending an SBA loan when it's fitting or an equipment lease if the buyer has funds to cover everything else," Dodson notes. "Not only do brokers do most of the work for borrowers, but they also [facilitate] the process for [franchisors] because they're familiar with our systems."

Getting Together

One recent trend in franchise financing has franchisors entering into nonexclusive partnerships or alliances with finance companies. When Jana Sappenfield applied to open a Dallas franchise of Primrose School Franchise Co., a child-care chain based in Atlanta, she was given a list of lending sources, including banks and loan companies.

In search of $1.6 million of the $1.9 million required for her first franchise, Sappenfield checked out a local bank in Dallas as well as Newcourt/AT&T Capital, two of the lenders listed. "They offered the same interest rate," says Sappenfield, "but I felt I could work with the Newcourt/AT&T people a lot more easily. Our personalities matched. They offered more information, guidance and personal attention. They were also familiar with Primrose, so no time was wasted researching or approving the franchisor." At the end of 1998, Sappenfield purchased her second Primrose School franchise (this one in Tampa, Florida), and her loan application sailed through the Newcourt/AT&T approval process.

Like Newcourt/AT&T, which is an SBA-certified lender that has preferred relationships with about 25 franchise concepts, companies such as The Money Store, Commercial Capital Corp., International Franchise Capital, Business Capital Resources and Phoenix Financial are shoring up preferred-lender status with franchises nationwide.

"We're comfortable with the franchises we work with regularly; we know the leadership and have an understanding of their selection criteria," explains Gary Weiss, vice president of franchise finance at Newcourt/AT&T. "Consequently, when an approved loan application comes from a franchisee with a preferred system, we are certain the candidate is qualified. Of course, we still do our due diligence."

Shop 'Til You Drop

Before settling on the franchisor's recommended financing sources, however, check out all your options. "Shop, shop, shop," urges Howard Bassuk, president of the Franchise Network. "There are many choices in lenders, just as there are many choices in franchises. You should devote as much time and effort to finding the right loan as you devoted to finding the right franchise."

Bassuk, whose worldwide chain of franchise brokerage offices is based in San Diego, suggests first asking the franchisor for financial support. "[Then] call or visit banks, loan companies, leasing companies, brokers, local business development groups, friends, relatives, pension plans, credit unions, mutual funds--anyone who may be in a position to lend money," he advises.

While some major banks may not make franchise loans, "Virtually any bank that makes SBA loans will certainly consider making a franchise loan," says Bassuk. "After all, banks are in the business of making loans, and franchise loans are particularly attractive because the lender can track the experiences of other franchises in the system, evaluate the success of the concept and project future income."

Wherever you seek funding, remember that money is a commodity. Shop for it wisely. Negotiate. Make the best deal. Both you and your lender have something to gain from this transaction. "Don't walk into a bank or finance office with your hat in your hand," Bassuk counsels. "They aren't doing you any favors. They must lend money to stay in business, so present them with an opportunity to make a good loan, and they'll lend it to you."

Give 'Em What They Want

Even before you apply for a loan, devise a plan for repaying it. Getting the money may be your primary goal, but getting it back is the most important thing to the lender. So as you prepare that business plan, research your market, and study each page of the UFOC, keep in mind that your primary objective is to convince the lender you'll repay the loan.

What convinces lenders?

"Information," says Michael Duckham, account manager of Sacramento-based The Money Store's franchise division. "The more information the borrower provides us, the more likely we are to approve the loan."

Duckham wants to see a well-prepared business plan, tax returns for the last three years, a resume, site information, build-out estimates from local contractors, a demographic analysis, actual and projected income of franchisees, and a variety of other information from the borrower, the franchisor and the local chamber of commerce. Whew.

If you're unfamiliar with writing a business plan, seek professional guidance or check out business plan preparation software such as Business Plan Pro ($165 from Palo Alto Software, 800-229-7526), or BizPlanBuilder Interactive ($149 from Jian, 800-896-5426).

Steak Your Claim

The odds weren't in Robbie and Paula Vallejos' favor. But after months of diligence, the couple secured a $165,000 bank loan to buy a Steak-Out franchise.

After 13 years with the U.S. Marine Corps, Robbie, 38, moved with his wife, Paula, 37, back to her native South Carolina with the intention of buying a franchise.

To prepare himself, Robbie worked in a relative's Steak-Out restaurant in Montgomery, Alabama, for three months. But Atlanta-based Steak-Out Franchising Inc. was reluctant to award a franchise to a couple who had no business background and probably couldn't raise the $217,000 in start-up costs.

But the Vallejoses did their homework. "Paula and I researched the Rock Hill area, collecting information on the local economy, demographics, population growth and industry," Robbie recalls. "We got a lot of direction and help with our business plan from the chamber of commerce and the SBA."

By the end of 1995, the couple had raised $52,000, and asked the Bank of York for the balance. "We presented an impressive proposal supported with lots of documentation from Steak-Out," says Robbie. Three months later, they got the money, and by December of 1996, they were open for business.

Steak-Out was so impressed, in fact, the company drafted Robbie to help other franchisees prepare their loan packages.

Now, two years later, the Vallejoses' full-meal delivery franchise is grossing $11,500 a week. Guess they were a good risk after all.

Contact Sources

Business Capital Resources, (800) 572-8398,

Primrose School, (813) 641-9555,

Steak-Out, 990 W. Main St., Rock Hill, SC 29730, (803) 329-8611

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