Starting or purchasing a franchise comes with many challenges, and one of the most significant is securing financing. Around 33% of small businesses fail within the first two years, and about 50% shut down within five years. The primary reason? They run out of money. In this article, we’ll discuss nine different strategies to consider when looking for financing for your franchise.
In my experience, many entrepreneurs are constantly chasing financing. Despite what you may read, securing small business financing can be challenging. You need to be creative and look under many rocks to find affordable financing.
Challenges of Limited Access to Capital
Lack of Funds to Grow Business
As your franchise grows, opportunities will present themselves. For example, a client of mine had a chance to launch their product in a nationwide grocery chain. While this was exciting, it required significant upfront capital for production, marketing, and inventory before any revenue was realized.
Lack of Financial Knowledge
Many entrepreneurs lack confidence in the financial side of their business. They might come from a background in sales or operations and feel uncertain when talking to banks or investors. It’s essential to present your financial situation positively and highlight the growth and opportunities ahead.
Unclear Process
Unlike buying a house, obtaining business financing can feel like the wild west. The process isn’t standardized, making it intimidating for those unfamiliar with it. Knowing where to start and who to talk to is crucial.
Poor Financials
Traditional financing methods often require a review of your financial statements. During the startup phase, your financials might look “ugly” because costs often exceed revenue. Banks prefer businesses with substantial profits and collateral, which many small businesses lack.
Nine Ways to Overcome the Challenges of Limited Access to Capital
1. Bank Loans
The preferred method for raising funds is a business loan from a bank. Start with your bank, especially if you have a relationship with your banker. These loans don’t take equity in your business and often have the lowest interest rates. However, 80% of small business loan applications are rejected, so this method can be challenging.
2. Small Business Programs
Many states have small business lending programs, often through Community Development Financial Institutions (CDFIs). These organizations have more flexibility than traditional banks and provide capital sustainably and responsibly. An example is the Colorado Enterprise Fund.
3. Crowdfunding – Non Equity
Platforms like Kickstarter and Kickfurther help small business owners raise funds without taking equity. Financing can be quick and flexible, although interest rates and costs might be higher than traditional financing.
4. Crowdfunding – Equity
Platforms such as WeFunder and Start Engine allow you to raise capital by giving up equity. This method doesn’t involve interest but can be costly in terms of marketing expenses. Work with a financial advisor to navigate this path.
5. Lending Clubs & Online Lending
Platforms like Lendio, Kabbage, Funding Circle, and LendingTree offer quick, smaller loans. However, these loans often come with high interest rates, sometimes between 20-30%.
6. Friends and Family
Friends and family can be a viable source of funding. This type of funding can be either debt or equity. A financial advisor can help both parties reach an agreement and understand the transaction.
7. Microlending
Microloans are small, short-term loans with low interest rates, usually extended to small businesses and startups with low capital requirements. The SBA has an excellent microlending program, and other providers include Kiva, LiftFund, and Opportunity Fund.
8. Customers and Vendors
Securing funding from customers or vendors can make sense in certain situations. For example, a client of mine received a loan from a future customer to purchase equipment, with the agreement to supply a certain amount of product at a lower-than-market cost.
9. Small Business Investment Company
A Small Business Investment Company (SBIC) is a privately-owned investment company licensed by the SBA. SBICs provide small companies with both equity and debt financing. They use capital raised and funds borrowed at favorable rates, thanks to SBA loan guarantees.
Conclusion
Financing a franchise can be challenging, but there are multiple avenues to explore. Consider working with an outsourced CFO to navigate these options and craft a compelling financial narrative for your business. By being creative and persistent, you can find the financing needed to succeed.
For a comprehensive list of SBICs, visit the SBA’s website.