Great Ways to Cut the Cost of Starting Your Franchise Business

Posted on November 13, 2007 by Ginger Watford

One of the reasons a franchise business has such a high potential for success is because of all that’s included in the initial cost.  In some cases, the start-up cost is the same (or very close) to building a business from scratch but without all the benefits such as established name recognition, target market research and existing publicity campaigns.  With so many advantages, it can be difficult to understand why entrepreneurs choose to launch a business alone.  Nevertheless, some of the high costs associated with franchises can become a deterrent for prospective buyers.  What many of them don’t realize is that there are several options that help cut the cost.

Options for Financing Your Franchise
Many franchise opportunities come with a sizeable price tag.  Few prospective business owners can afford to make such an investment without some financial assistance.  Unfortunately, not all of them will have access to the necessary capital it will take to satisfy start-up costs, franchise fees, royalty fees and a loss in revenue that will continue until the return on investment finally begins.  If you have a well-established credit history (free of bankruptcies and established to the point where you’re considered as having enough credit), you may be able to get a conventional loan through a bank or credit union.

However, banks are typically reluctant when lending to small businesses.  In reality, they rarely do so.  Though not everyone will qualify for conventional loans, there are still options.  If you have applied for credit to no avail, you can contact the Small Business Administration, an agency run by the federal government.  The SBA guarantees a certain percentage of its loans, which puts lenders at ease because they are less likely to experience a loss.  Plus, the SBA is usually willing to lend for longer periods of time and at larger amounts. 

Of course, the SBA has specific criteria to determine eligibility.  First, it must be a small business, which translates to less than $13.5 million in retail or service sales.  Additionally, it must be located in the United States or a U.S. governed territory and only those interested in opening a for-profit business can apply.  As you can imagine, this agency reviews countless applications, which means that you must handle yourself in a very professional manner.  It is always a good idea to have your business plan ready before meeting with anyone regarding financial assistance, even a government agency.

However, the main disadvantage to getting an SBA loan is that the interest rate is set by the Treasury Department, which means that it is variable.  Moreover, this interest rate is generally higher than those offered by conventional loans.  Thus, if you can find a close friend or family member who is able and willing to lend you the necessary funds or even cosign, this is your best option next to financing on your own through a bank.

Economic Development Corporations
The federal government is not the only entity that provides monetary assistance to potential franchise owners.  More and more state and county governments are pitching in with tax exemptions and other special programs.  The New York City EDC, for instance, issues low-cost tax exempt bonds as well as double and triple tax exempt revenue bonds (these are technically issued by the New York City Industrial Development Agency, NYCIDA, an entity of the NYCEDC).  Furthermore, this agency can even administer public loans.  The only issue to consider before accepting assistance from an EDC is the fact that much of the available funding is dedicated to improving low-income or developing areas.  Nonetheless, EDCs have funds available to prospective business owners like you.  And, you have the opportunity to impact a struggling community.  Still, before you decide to locate your franchise in such a community, make sure it is conducive to operating a profitable company.

Community Development Corporations
These non-profit organizations are dedicated to improving their local economies by lending money to small businesses.  The goal here is to increase revenue and bring new jobs to the area.  What’s more, CDCs are well known for developing affordable housing and improving education for residents in low-income areas.  Once again, you must weigh the costs and benefits to starting a business in developing or otherwise lower income sections of a town or city.

Business Development Corporations and Venture Capitalists
If you’re weary of relying on public funding, you have the option of appealing to a business development corporation or venture capitalist in your territory.  Returning once again to New York, its business development corporation is made up of financial institutions that pool their resources in order to lessen the risk.  Rather than focusing on low-income sections of the state, this organization is devoted to helping all kinds of different businesses gain access to financing.  The primary concern is to expand New York State in general.

Venture capitalists, on the other hand, are different from development corporations because they assume some ownership of your business.  Because of this unique feature, they are willing to take more risks than traditional lending institutions.  Depending on your specific industry and the stage of your business’s development, you may be able to find a venture capitalist fund to help finance your business.

Take Your Time
While there are opportunities for financing your franchise business and dramatically reducing your initial cost, keep in mind that some franchisees use their own resources for as much as 50 percent of their start-up expense.  If you can not afford that kind of investment, consider working for a couple of years and saving some of the money for yourself.  If you’re able to generate some revenue this way, you are more likely to qualify for a conventional loan.  Otherwise, you will appear more serious to business development corporations and reputable venture capitalists.  Thus, if you decide to wait after all, don’t become discouraged.  Instead, use the extra time to conduct additional research and perfect your business plan.  Sooner than you realize, investors will be eager to take part in your project.