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The franchise industry continues to grow at a record pace, with one out of every eight jobs in the United States being related to franchising. One of the most prevalent trends is the growth of emerging franchise brands. In the U.S.A., a generally accepted definition of an emerging brand is a system with under 50 operating units, and a micro-emerging brand has under 12 units. Emerging franchise brands are more common than ever. In fact, over 40 per cent of brands that offer franchises in the United States began awarding franchising within the last five years.
While funding emerging brands may present unique challenges, FranFund has the expertise to simplify the process for both emerging and established brands. FranFund has helped countless entrepreneurs fund their dreams of owning a franchise regardless of the industry, sector, or location.
What to consider
The franchisor of an emerging brand would be wise to consider a few crucial points relative to funding that will impact future franchisees’ ability to obtain the funding they need. For example, FranFund recommends that at least the first 20 franchisees of a new system have a strong financial history and sufficient capital. Those franchisees will establish a reputation for your brand in the lending community. This reputation can go two ways: you have 20 high-performing franchisees that validate well, or you have franchisees within those 20 that default on their SBA loan. Lenders view a loan default as both the borrower’s and the franchisor’s responsibility. An oft-repeated phrase in the franchise industry is ‘businesses fail for a number of reasons, but being overcapitalized is not one of them.’
The funding solutions available to the potential franchisee of an emerging brand will depend on the total project cost (TPC). The TPC is the cost of the franchise fee, equipment, marketing, licensing, leases, etc., plus working capital. Emerging brands do not have the benefit of a regional or national reputation that would generate immediate lender interest. It is essential to bring a financially strong borrower to the table for an SBA loan to mitigate that issue. Put simply, if you do not have strength of brand, you need to bring that strength in the borrower.
Funding strategies
Two of the most common capitalization strategies for buyers of an emerging brand in the United States are Rollover for Business Startup (ROBS) and Small Business Administration (SBA) loans. Other solutions for funding emerging brands may include:
- Signature loan (unsecured)
- Securities-backed loan
- Equipment leasing
- HELOC (home equity loan or line of credit)
Franchisees of emerging brands can use a combination of these as a complete funding strategy.
Funding strategies
Utilizing a rollover program such as FranFund’s FranPlan allows candidates in the United States to access their qualified retirement savings tax-deferred and penalty-free to invest in their business. The revenue service of the United States government called the Internal Revenue Service (IRS) affectionately refers to this process as ROBS or Rollover for Business Start-Up. Using this program, the franchisee invests their retirement account from a previous employer into their new business. At the end of this transaction, the new company operating account has cash available for any legitimate business expense, and their new retirement account has shares of stock equal to the initial investment.
As the business grows and prospers, the value of the stock grows, most often performing better than your stockbroker! Using this option as the entire capitalization strategy means that the new franchisee opens with little or no debt and therefore reaches break-even sooner. However, you can also use this product paired with a business loan for the down payment (also known as equity injection) for the loan. The IRS, however, does have strict guidelines regarding the execution and maintenance of the plan. FranFund offers the IRS-mandated Third·Party Administration (TPA) service to ensure your retirement plan maintains the IRS compliance requirements.
SBA loans
The Small Business Administration {SBA). is a U.S. governmental agency. provides a guarantee to lenders to incentivize them to consider riskier loans. Generally speaking, lenders think all business startups and first-time business owners are risky. The lender’s number one objective is to be comfortable with the borrower’s ability to repay the loan. The SBA program works with lenders to offer business loan programs for startup acquisition expansion, and working capital with values available up to five million dollars. FranFund has developed a portfolio or SBA lenders across the United States that understand the value proposition of the franchise industry and have a large appetite for franchise loans, including Joans for emerging brands. Your funding partner’s role is to help prepare a loan package and shop the loan to the company’s lender net\vork to get your candidates the best rate and terms on their emerging franchise.
Finding the right options
Around the internet. your candidates may find interactive funding or pre-approval tools that allow input of key information about assets, and credit scores. investments. available cash, and more, allowing them to calculate a funding amount for which they qualify. Franfund offers a tool for this. However. there can be tremendous variables and factors that these tools are unable to accommodate. The most efficient, effective, and accurate way to get an assessment and prequalification is to speak to an expert franchise funding consultant. It is advantageous to work with an established funding partner such as FranFund, which uses a franchise-specific pre-qualification. has extensive expertise in the franchise industry with emerging brands, and has relationships with lenders who are comfortable working with an emerging brand franchise model.
At a glance
FranFund de-signs flexible funding plans that fit perfectly, no matter how rapidly your franchise grows. The company’s top funding programs are SSA Loans and 401(k) business funding, which allow you to use qualified retirement savings tax-free and penalty-free.
Year established: 2006
