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Avoiding Franchise Funding Mistakes

By: Jania Bailey



A potential franchisee seriously interested in becoming an entrepreneur will take several demonstrative steps throughout the ownership process. Some important milestones, such as reviewing your Franchise Disclosure Document (FDD), we’ve covered before. This week, we intend to focus on a topic with an equal level of importance—that being the financing options available to the franchisee. It is our hope that you will be able to avoid potential mistakes and find a suitable solution which matches up perfectly with your own financial position.

Allow us to introduce to you the Top 5 Pitfalls of franchise funding. Take heart, because making the right decisions will illuminate a path to success and growth. A costly mistake could jeopardize your break-even possibilities and even hamper your effort to achieve viability in the marketplace. Some of what you are about to read is just plain common sense, but you may find just find the “gem that keeps you out of a jam!”
Pitfall Number One: “Pump Your Brakes”
You’ve spent the requisite time in choosing to meet with a qualified franchise consultancy like FranNet, whose sole focus is matching the right opportunity with the right option just for you. You were so careful in your research. You believe in the franchise concept, possibly even because you have a background which gives you valuable insight. You did your due diligence through the FDD process. You have arrived at this point because you were both cautious and prudent with your time in researching the development of your soon-to-be franchise. And now it’s time to explore financing options. This is not the time to hit the gas and floor it. Stay as focused and patient as you have been up to this point—because now we’re literally talking about dollars and cents. Never let your emotions override the necessity for exploring any and all financing options before you pull the trigger and write your first check—even if you do feel that close to the finish line.
Pitfall Number Two: “Get Your Own Financial House in Order”
Are you really prepared to secure the necessary funds to activate your new business? Understand that during this time of extraordinarily tight financial credit, bankers and lenders have nothing but time to disqualify you for even the simplest of reasons. Things may have been going great in the past few years for you. Maybe you received a healthy severance package from a previous employer. If this is the case, now isn’t the time to buy the Porsche you always wanted. Or that bass boat. Or anything extravagant for that matter. Obtain your credit report and scour it for the most minute of details. Know your credit score by heart. Be ready to explain anything that could hinder your ability to secure the necessary funding you may have thought was going to be a breeze. Because it almost never is. This is the time to get your own financial house in order.
Pitfall Number Three: “Consolidate Your Exposed Risk”
Credit lines, second mortgages, and even a charge card application at your local department store may be lurking, ready to raise a red flag on your credit report. While most informed people already know this fact, your credit history is “run” each time you apply for credit. And this process, if repeated, is enough to negatively affect your credit score. At a time when you are preparing to fund a business of your own, you have to take into consideration all purchases and all credit checks. Aim low, not high!
Pitfall Number Four: “There Are Many Options”
Financing for your new business does not necessarily mean you have to troop down to your local banker at the nearest branch and fill out a form. Your franchise consultant should be able to assess your current financial position and be ready to offer you the most viable solution. Have you heard of the 401K Rollover Option? No? Trust us when we say, there are several advantages to utilizing your own hard-earned income if at all feasible. There are a few nifty tax-breaks involved and any small advantage has the potential to get you to break-even and profitability faster than you might have expected. Do your homework. Research your options. Ask around. Talk to other franchisees. They’ll likely be more than happy to give you an account of their own personal finance story. Don’t be the franchise owner a few years down the road ready to tell the next potential small business owner of wanting a “do-over” on your own financing experience.
Pitfall Number Five: “Avoid the Risky Options”
Unscrupulous online lending firms and a host of other “peer-to-peer” financing groups prey the Internet like a hungry pack of lean wolves. If you are truly qualified, as determined by a licensed franchise consultant, you shouldn’t have to turn to this option if at all possible. Sure, there are bound to be a few success stories in the mix, but these companies will often times promote the heck out of the good examples while sweeping the bad ones under the rug. Keep in mind that you should have an endless supply of legitimate options when it comes time to discuss franchise financing. Speak to your representative and allow them to guide you properly.
This article was originally published by FranNet


Published: July 12, 2013

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Jania Bailey

Jania Bailey is president/COO of FranNet, North America’s most well-respected franchise consulting firm. Bailey sits on the board of directors for the International Franchise Association (IFA) and is a certified franchise expert. Her background includes over 25 years experience in the banking and franchise industries.  Bailey also authored the book, “Thriving – The Journey to Success in the Business World.” 

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