If you are a business owner who wants to franchise, and financing is a top priority, there are a number of ways to obtain franchise financing. Before heading off to the traditional bank, you may want to consider other sources.
Recently we spoke with La Mancha Sims, Managing Director for Triton Business Group Inc., on financing advice. Triton has been in business since 2009 and specializes in raising capital for business owners. Triton has raised over $75M in capital for businesses since it started.
What should a business owner have in place before seeking financing?
The most successful business owners seeking financing know that they have to have their financial house in order before they come to us. Most importantly having an up-to-date Profit and Loss Statement showing the business having a positive profit position. This makes sourcing funding easier, either through us or our resource of funds, to get the money that is needed.
Is an accountant necessary?
Every business has to have a professional team. They need to have a good attorney, a good business development team, and a good certified public accountant (CPA). Having a good CPA is critical to managing the business’ financial position. If the business can’t afford to have an in-house CPA, try a co-op. This is especially important for franchise owners, who are trying to expand and bring on more franchisees, to keep track of their business financials; how their business is growing, and how helping to fund new franchisees affects their bottom line.
What are some pitfalls business owners fall into when trying to get financing?
Unfortunately, the biggest pitfall many business owners fall into is waiting until they are already in a bad financial situation before they start moving to try and raise capital or get funding. The ideal time for a business to establish a line of credit is when the business is in its strongest financial position. Waiting until the business is having financial difficulties makes it much more difficult to obtain financing. The line of credit, which may not immediately be needed to run the business, is like having overdraft protection on a checking account – when it’s needed, it’s there. This is especially true for franchise owners who know they are going to grow and bring on other franchisees. In the future, when a cash flow crunch hits, and it happens in every business, a line of credit safety net is already in place.
What should a business owner know in order to secure financing?
First and foremost is for the business owner to be prepared to speak in detail about their business and personal financial positions. A business owner may have to give a personal guarantee, and that means talking about their personal financial situation.
They need to know:
- their credit scores, both personal and business.
- if they have any negative or derogatory marks on their credit history.
- how to talk about their business finances in detail.
- what collateral they may be able to bring to the table, if they don’t have any collateral, be able to explain why.
Being as upfront as possible makes financiers more willing to lend, plus it makes the process go a lot quicker and smoother.
What are some of the advantages of using alternative funding sources instead of traditional sources?
Less red tape. Alternative lenders, like Triton, have a much quicker process. It is a little more expensive to use an alternative lender, but the speed at which the business gets the money is one of the big benefits. There is also the personal touch that traditional banks don’t do, unless the business owner has a personal or private banker. Triton gives business owners that personal touch. We hold the business owner’s hand and walk them through the whole process. We have a little more flexibility to give them the opportunity to explain any negatives. Many traditional banks make decisions based on computer algorithms. They put the businesses’ information into a database and out pops a number that determines if the business gets the money or not, without any explanation on how that final number was generated. At Triton, we have good personal underwriters, who can tell the business owner exactly what went wrong, if they were not approved. The business owner than can make those corrections to their financial situation, come back to try again, and we won’t hold that first time against them.
Are there and hidden or higher costs to this type of financing?
With most alternative lenders, the business is paying for speed and flexibility, which does come at a price. The interest rate is going to be 3-5% higher than the traditional banks since it is in the secondary market. The originating costs can average 4-5% higher. The secondary market is a riskier pool of people, and with that risk we have to increase the rate of return. A business owner needs to take this into consideration as they build their pricing model.
What are the risks of going into the secondary market for financing?
The biggest risk going into the secondary market is finding vendors that can’t perform. Instead of doing in-house underwriting, they are taking the business’ package and shopping it around to other institutions. As they are shopping around, the business is getting hard inquiries on their business credit and personal credit. When the business owner comes to a company like Triton, and we see maybe two inquiries with banks and 8 inquiries from a lot of other places, that’s a bigger conversation. All those inquires not only makes the business look bad, but it puts up a red flag that all these places turned the business down. So before signing with a secondary lender, know if they are doing the underwriting in-house. Are they going to source out the loans? Transparency is what a business owner needs to look for in an alternative lender. The transparency will help them decide who is good for the business, and who is going to help source the capital needed for business growth.
For business owners expanding into franchising, contact Geometrx about our franchise territory mapping software at 888-848-4436.