Franchisees face different challenges than other small business owners. More challenges, really. You have to deal with all the usual small business operations details. But you also have to work within the structure dictated by your franchisor. These differences can affect your options when it comes to small business loans. If you’re considering a second franchise location, I assume your original store is doing well. And you’ve developed a good working relationship with your parent company. I have some tips to help you find the best-fit small business loans to open your new location. But I know every franchisor operates differently. So for the purposes of this article, I’ll be general. You can follow the tips that work for your situation.
ARE YOU READY FOR A SECOND LOCATION?
Business writer Melissa Thompson notes, “The idea of opening a second location is tantalizing: It offers expanded audiences, extra prestige, and increased profits. However, expansion can be dangerous and taking on additional responsibilities before you are ready can cause your existing business to topple.” Are you confident in your decision to expand?
By now you know what it takes to be a successful franchise. Your parent company may have approved your application to open a second location. But there will still be limitations or requirements you’ll have to follow. No matter what those are, Ms. Thompson recommends you feel certain about two things:
- You have found the perfect location. You don’t want to merely pull customers away from your current store. But ideal separation depends on your specific franchise and target audience.
- Can your current store function without your personal presence? With a second location, your attention will be divided.
Will you lease space? Or will you need to build from scratch? This significantly affects the size and type of small business loans you should consider.
YOU’LL NEED MORE THAN SPACE
SBA and other small business loans give you working capital for expansion. You can use some of that money to purchase equipment for your new location. But you might want to consider leasing instead. This can be especially attractive if you need to upgrade equipment often. Or if the equipment will take a big bite out of your loan.
Be sure to compare costs of leasing or financing equipment against outright purchase. Paying cash up front will improve your cash flow. That can be crucial, because franchises usually operate on very tight margins. But it might be smarter to use that capital for other aspects of your new store.
You’ll need new staff, too. And you can use some of the working capital from your business loan to cover payroll. The people you hire can make or break your new location. Some franchise companies have rigid rules about where and how you purchase equipment, inventory and supplies. You may have little to no leeway here. But customer service is one an area where you have total control over your business.
If your current store is successful, it’s likely you have great staff. Let them help train your new people. That will help get your second location off to a solid start. The faster you can grow your new business, the better return you’ll see on your small business loan.
CONSIDER BANK LOANS
Assuming your franchise has a good credit score, you may be eligible for a conventional business loan. The bank will want detailed financial information. And collateral. They will also look at overall franchise performance. How does your store compare?
The Wall Street Journal says, “Bankers favor businesses with brand names and long track records of consistent cash flow, so your choice of a franchise system can help or hurt you. Ventures with few locations are less attractive, in part because they lack proof that they can do well in all types of areas or economic climates.” If your brand is listed with the Franchise Registry, that will boost your chances. The fact that you’re looking to add a location rather than borrow as a “franchise newbie” will help, too.
There are now millions of women entrepreneurs in the United States. Many of them own franchises. If you’re one of them, you’ll be happy to hear that it’s getting easier for women to secure small business loans.
SBA MAY BE A BETTER OPTION
SBA backing can make the difference if you’re not quite eligible for a traditional bank loan. SBA’s 7(a) loan program is the go-to resource for many small businesses looking to expand. About 10% of these loans go to franchises. Most are between $250,000 and $500,000, but you can borrow up to $2 million. Like conventional bank loans, you’ll need good credit. And you’ll have to show you have the cash flow to support repayment.
Opening a second location takes a great deal of planning. That means you probably have plenty of time to wait for bank loan approval. It can take as long as two or three months. If that doesn’t work for you, United Capital Source offers a much faster SBA Marketplace loan. You can borrow up to $350,000. And get funded within a week. Talk to us about eligibility requirements.
CHECK OUT ALL YOUR CHOICES BEFORE DECIDING
Franchise companies understand it can be tough to find funding. So some of them now offer their own internal financing. Others have partnered with specific lenders to provide small business loans. My suggestion is, shop around anyway.
You shouldn’t automatically assume those options are your best deal. Collateral requirements, payment terms and other important details vary from one company to another. Our United Capital Source team may be able to match you with a more appropriate type of business loan. At more competitive terms.