October 31, 2014

Finding Money for That Franchise When Money is Tight

Are You Looking For Loans In All the Wrong Places?Commercial lenders have been making life difficult for future franchise owners and small business owners looking for capital.  President Obama and his administration have been putting the heat on lenders.  So far, however, that has not turned the credit situation around.

The franchise industry — where franchisees get a “business in a box” setup, is also feeling the pinch. Franchises known to have a proven system for success used to get fairly quick loan approvals.  These days, though, they aren’t getting approved like they used to.

A recent article in Franchising World magazine states that:

“… financing for franchisees continues to be an obstacle to the growth of franchise brands. Conventional lenders have pulled out of franchise lending unless the concept meets very stringent criteria.”

Until recently, all the lenders that I’ve ever worked with (to help get my franchise candidates a small business loan) have been pretty easy to work with, and were looking for ways to approve the loans.

As a matter of fact, over a period of a number of years, I only remember two or three instances in which candidates of mine were ever turned down for a loan. Things are a lot different now.

It may be time for all of us to stop living in the problem, and start living in the solution.

Since traditional ways of obtaining start-up loans and expansion loans aren’t working anymore, I’m thinking that it’s time for some deep exploration of some non-traditional routes.

Folks that are finding it difficult to get the “approved” stamp on their loan applications are starting to approach specialty lenders.  The Wall Street Journal’s Emily Maltby not long ao posted an article about these types of lenders, suggesting that:

“… business owners who approach specialty lenders have an advantage. The loan officer already knows the revenue potential, financing and cash-flow needs of that industry, particularly in the context of the broader economy, and can advise with keen awareness of any snags in the business plan.”

She gave an example of an entrepreneur who wanted to open an emergency animal clinic, but was turned down numerous times by conventional lenders. (She ended up getting financed by a specialty lender.)

Is your future or current business in a niche that may have some specialty lenders that can give you a real shot at obtaining a loan?

Another “specialty lender” could be your Uncle Mort. He’s the one who told you years ago, “You’re going places kid. When you’re ready to go into business for yourself, I’ll back you.”

If there was ever a time to cash in that chip .

I’m thinking that there are a lot of nephews, nieces, sons and daughters around who are going to their families for business loans.  I wonder if their loans are getting the “approved” stamp.

If you do end up going the family loan route, it may be wise to consult with a business attorney.  There could be legal ramifications for you, and the family member. There may even be issues relating to taxation, too.

If your business start-up is one that has equipment needs, there’s pretty good news for you. Companies like Direct Capital have been expanding their financial capacity for a while now, and may be able to provide some leasing options for your business. Leasing your equipment can be a good way to free up some of your up-front loan requirements.  (Maybe even enough for your lender to approve your small business loan.)

There is another way to get a business off the ground, but it’s a bit controversial. It involves using a portion of your 401K money.

Jeff Schnepper from MSN.com, explains the process;

“First, get yourself a lawyer and an accountant. This is not a do-it-yourself project. Though the structure is relatively simple, the implementation can be complex.”

Then he describes how this works;

“You set up a corporation. You’ll become an employee of the new corporation. The new corporation sets up a 401(k) plan that allows the rollover of existing retirement funds into the new account. This is a self-directed plan — you run it and make all the investment decisions.”

Here’s where it gets a bit more complicated;

“Under your direction, the 401(k) then buys stock in your new corporation. The corporation uses those dollars as seed money to cover your wages and other working capital needs.”

Finally;

“You’re not taxed on any of the money that goes to your new corporation. And there’s no 10% early-distribution penalty either. The key here is that your new 401(k) is making an investment, not a distribution. But what you’ve done is convert your retirement account into instant business capital by using the rollover process. And you’ve done it without a tax hit.”

Read the entire MSN.com article about using funds from your 401K to start a business.

I’ve had a few candidates of mine go this route over the years, and they seemed comfortable with the process.

Determined current and future small business owners will continue to use creative financing arrangements to reach their goals. Are you determined, too?

 

9 Comments ▼

Joel Libava - Franchise Expert


Joel Libava Joel Libava is the Franchise Expert for Small Business Trends. Joel, The Franchise King®, equips today’s prospective franchise owners with time-tested, proven techniques designed to increase odds of success. He does this through one-on-one coaching, and gobs of useful content that can be found on places like Small Business Trends, SBA.Gov, and his award-winning franchise blog, The Franchise King Blog . He’s been featured in Entrepreneur® magazine, and is frequently called upon by national media outlets and publications for his no-spin insights into the world of franchising.

9 Reactions

  1. I agree with “It may be time for all of us to stop living in the problem, and start living in the solution.” The media has hyped up the recession so much that it brought everyone down. Live how you want to, recession or not. And if you are a small business look into new solutions (Business Coaching)

    http://www.actioncoach.co.za/

  2. It is better always to start a business if u lack the cash.

  3. Thank you for your comments…

    Paul, I agree. it’s a real smart thing to do:)

    The Franchise King

  4. Small business, which has forever been recognized as the economic engine that drives the nation, has suffered tremendously as a result of tightening credit or banks simply not lending period. Working Capital loans have been used to help businesses, expand, advertise, remodel, purchase inventory, increase sales or basically just grow, leading to possibly creating more or new jobs.

    Businesses with good “cash flow” that are hoping to grow are unable to because more often than not revenue is committed to other business burdens (overhead, insurance, payroll and etc) which leave little in the way of funding for “growth”.

    Fortunately, for many small business owners there is a relatively new loan available for companies that do not “fit” the ever-increasing and more difficult “demands”/requirements of Traditional Funding sources (banks, etc). Most banks require 2 to 3 years in business before even considering a request… The importance of this is that most one year old businesses that are generating sufficient cash flow was built on the backs of the owners “personal finances and credit” which has probably had a negative impact on their “Credit Rating and Collateral”. But now for businesses that have been in business for 1 year, and process at least $3,000 per month in credit card sales there is an option. These loans are based on “cash-flow” not on FICO score, on length of time in business or collateral, plus it is 40-80% less than a Merchant Cash Advance (which has been one of the only alternatives, until now).

    We will gladly forward info on this program as well as a FREE eBook with “TIPS and STRATEGIES” on BORROWING and how to better position your loan request to improve your chances to get loans funded.

  5. Joel,

    Thanks for showing us how to find money for your franchise business.

  6. The information is very much relevant for small business owners. that is how they can attain the maximum from the minimum.

  7. We supply hundreds of franchises and small business funding when they feel like they have no other realistic or beneficial options. We offer Lines of Credit, Leasing options, Advances, Factoring Solutions for all business types and situations.
    our blog is here: http://www.advancefundsnetwork.com/blog.php

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