In the wake of a recessionary cycle that has only recently begun to show signs of a turnaround, retailers have faced a number of significant financial and logistical challenges. But while existing retailers have faced a number of challenges, from a grim real estate market, to tighter lending standards and lower levels of consumer spending, the rugged economic landscape has been an especially difficult issue for aspiring small business owners. For prospective franchisees, the financial hurdles to opening a small business franchise can seem bigger than ever.
Up until approximately a year ago, the most common method that a prospective franchisee would use to secure financing for a new small business was by securing a home equity line of credit. With a house the single biggest asset in most people’s personal portfolios, home refinancing always made sense. But with homes losing value and banks hesitant to lend, refinancing options have become more limited for many. Some alternative business loans are available through local banks, and the SBA can provide some assistance in the form of low-interest SBA-backed small business loans, but such programs are relatively limited and frequently the application and review process can move quite slowly. Fortunately, however, there are many other viable and effective ways to move forward with financing. Navigating the difficult lending market to open a franchise can seem like a daunting prospect, but there are a number of available options to finance a new small business in an efficient, effective and responsible manner.
Rolling it over
A 401K rollover is one popular option for prospective franchisees. A 401K rollover essentially utilizes an existing IRA as a funding source for a new business; doing so without incurring any taxes or penalties. There are a number of companies that specialize in assisting clients with the logistics of a 401K rollover. The basic process involves putting together a corporation and a 401K transfer package, and then purchasing stock in the corporation. The net result is a process that enables individuals to utilize their savings to fund the opening of their own business; making, in a very real sense, an investment in themselves. And because those savings are treated as an investment in the business, there is no corresponding debt to increase overhead for the new business.
Taking stock
Selling stock or liquidating existing assets is always one possible financing option. While not everyone has the investment assets necessary to make this a viable alternative to traditional financing, there are definite advantages to such a strategy. While there may be one-time tax penalties, the ability to secure up-front capital while avoiding the burden of interest and long-term financing obligations makes this an appealing option for some prospective franchisees.
Friends and family
An increasingly popular way to access the capital necessary to start a small business or become a franchisee is to assemble an investment group of family and friends. Turning to family and friends to chip in a small percentage of the overall financing can make funding more accessible and is often a more flexible and convenient option for new franchisees. There are different ways in which such arrangements can be structured. The franchisee may agree to pay investors back in a traditional manner, with a certain percentage of the investment (plus interest) repaid every month, or, alternatively, the borrower might agree to sell a certain percentage of the new business to those investors, who would then be eligible for quarterly profit checks.
Look to the landlord
One often overlooked option for aspiring franchisees is the availability of landlord financing to defray the expense of investing in a new business. One of the great benefits of becoming a franchisee is the ability to utilize the franchisor in landlord negotiations. Many franchisors have the experience, the information, and the influence to negotiate a more favorable deal on behalf of a new franchisee. It is not uncommon for a franchisor to negotiate 50% or more of buildout costs to be factored into a leasing arrangement and, in some cases, the landlord might even finance a portion of the up-front monies directly to the franchisee. In today’s challenging economic environment, more and more landlords seem willing to assist with lease improvements, provide a substantial building allowance, or even lend money (especially in cases where the client has particularly good credit). Landlords tend to be particularly willing to explore favorable financing options with service retailers, who do not need to expend additional resources to stockpile inventory and are subsequently viewed as less of an investment risk.
The bottom line is that there are options available to individuals who are motivated to start a new small business or become a franchisee. While starting a new business might seem like a prohibitively costly endeavor to some, as little as $100,000 is enough open many strip-center retail businesses out there. Perhaps more importantly, while securing financing might be a bit more challenging at the moment, the rewards are very much worth it; there has never been a better time to start a business! The up-side of a troubled economy is that new franchisees are able to lock down rental rates today that they could not have gotten just a few years ago. Overall overhead has been dramatically reduced, and for aspiring new franchisees willing to work to secure financing, a successful new small business can literally and figuratively pay off.
John Hoose is founder of Howell, Mich.-based LaVida Massage, a unique health and wellness massage center. LaVida has centers throughout the United States, with franchise opportunities in all 50 states and in Canada. For more information on opening a LaVida Massage contact Hoose at jhoose@lavidamassage.com or visit www.lavidamassage.com.
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