Recent economic volatility including mass layoffs and inflation has prompted many professionals to want to take control of their livelihoods. For those who have been bitten by the entrepreneurial bug, franchise ownership offers a proven template for getting started.
Texas ranks number one in the nation for franchise growth, with more than 75,000 franchise locations statewide1, making Houston is a prime location to consider setting up shop. Stellar Bankers have helped hundreds of Houston business owners to identify goals and financial tools to position their businesses for long term success.
Benefits of Franchising
The International Franchise Association and Oxford Economics reported that in 2022 franchise brands “drive 1.8 times higher sales than comparable non-franchise establishments…and typically pay 2.2% to 3.4% higher wages.” With higher sales and the ability to pay higher wages, franchising is a sector set to thrive in an anticipated recession. Franchises come with brand recognition, stable business models, and successful networks that lenders view as safer investments as opposed to financing personal startups.
Opening a franchise comes with immediate brand awareness, providing owners with saving on marketing expenses. Marketing a new business can be costly, with little to no return in the early years. By saving on marketing costs a franchisee can allocate more money to their operations budget. This can help owners:
- Put money into an emergency fund to cover unforeseen costs.
- Provide higher wages to attract quality employees.
- Have more working capital and cash flow to leverage other financing opportunities such as equipment financing down the road.
Stable Business Models
In a franchise, company standards, operations guidelines, and market research have already been defined by the parent company. With decades of knowledge of the target market and how the franchise responds to specific economic conditions, a franchise has a foundation to:
- Adapt to cyclical trends. The franchise has endured seasonal pricing and consumer changes and has the foresight of what to expect.
- Adjust to inflation. An in-depth knowledge of target audience spending habits helps a franchisee to understand how to adjust prices and products offered.
- Overcome supply chain issues. By franchising, an owner has a parent company to help provide inventory or equipment needed, which may be difficult to acquire if there is a shortage in their supply chain.
A successful network of owners, reliable vendors, and credible financers make franchising an attractive investment for owners and lenders. This inner circle of experts can share experiences and best practices with each other. This creates an easily accessible forum to ask questions, provide feedback, and gain knowledge on how to operate a successful franchise.
Path to Purchase
If you are considering opening a franchise, the core factors that affect your ability to find financing are:
- Credit score
- Personal assets
- Financial projections in your business plan
Your credit score will determine what kind of loans you qualify for, your interest rates, and repayment terms. If your credit score is too low to qualify for a bank loan, you may need to make a down payment by offering up assets as collateral. Or you may need to work on raising your credit score until it becomes suitable for securing business loans. Once that is in place, you will need to work with your banker on financial reports and projections in your business plan.
Stellar Bank offers a business plan development toolkit you can access here. A Stellar banker will review your financial situation and sales forecasts holistically to create a roadmap of possible financing options. Working with a banker in these three areas can help you, as a potential franchisee, decide if the path to purchase is right for you.
Franchise Financing Options
Stellar Bank provides SBA loans through a partnership with the U.S Small Business Administration’s 7(a), 504, and Express loan programs. These loans allow the borrower to contribute less of their own capital as a good faith down payment and provide longer payment terms than conventional loans. The 7(a) loan program has maximums of $5 million and 25 years. Stellar bankers will review the franchisee’s business plan financials to advise on how an SBA loan may be allocated and the interest rates connected to the financial plan. An SBA loan can help a franchisee purchase:
- Business real estate or construction of the building
- Equipment (504/CDC loans for franchises)
- Franchise expansion to additional locations
SBA Working Capital Loans
A working capital loan provides cash flow for short-term expenditures such as wages, inventory, and rent. Stellar Bank can provide working capital term loans to ensure your day-to-day operations stay on track. As with any business, a franchise may not immediately see a return on investment or profit. Or, as seen in current economic volatility, a product may suddenly increase in demand. Having cash readily available to purchase more inventory to meet consumer demands is crucial to staying ahead of competitors. The benefits of a working capital loan are:
- Access to $25,000 - $150,000
- Usually quick and easy to obtain
- No down payment or equity required
Depending on the franchise industry, a business owner will have a greater or lesser threshold of necessary equipment. With equipment financing, the equipment is the loan collateral and has monthly payments with a fixed interest rate and set repayment timeline. Financing equipment can provide affordable payments in real-time, but increases the total cost of the equipment over time. Therefore, business owners should work with a banker on equipment expense options to determine if they should finance or buy the equipment outright.