From an outsider’s perspective, owning a franchise might seem relatively easier than owning a traditional brick-and-mortar business. This is largely because, unlike their independent competitors, franchise owners aren’t exactly “on their own.” They are spared from myriad challenges that have proven to be tremendous sources of stress for the rest of their industry. Examples include having to develop a successful business model, making deals with suppliers, or investing in mass advertising campaigns that could very well turn out to be completely ineffective. According to these outsiders, the only somewhat significant price of such privileges is a cut of weekly or monthly sales, usually somewhere between 3%-10%.
But any franchise owner, or “franchisee” knows that this is far from the only financial obstacle they face. There are a number of expenses and scheduled payments they must indeed cover themselves in order to protect profit margins, no matter how the business is performing at the time.
When You Are On Your Own
In terms of expenses, it is up to the franchise owner to pay for new equipment, repairs, new furniture, and possibly a special training program for new employees. Before going any further, it should already be easy to imagine these expenses becoming difficult to afford. There’s the aforementioned cut of sales, seasonality, and the always-probable event of multiple major expenses piling up simultaneously.
Franchise clients of United Capital Source have taken out our unique franchise business loans to pay for new equipment upfront. Sales deductions make it difficult to save money, and waiting to cover costs directly related to revenue puts even more pressure on their already-damaged profits. But these aren’t the only ways franchise owners naturally lose money.
Hidden Franchisor Deductions
While franchise owners do not have to go through the trouble of maintaining relationships with suppliers, some of them are mandated to buy certain products, like ingredients or promotional items. Once the purchase is made, the franchisor takes a cut of the mark-up. Independently-owned businesses can choose who they work with, negotiate lower prices, or only buy products they feel that they truly need. But franchise owners must work with suppliers that apparently prioritize the franchisor, not the small business. The cut of the mark-up could be made through rebate deals or the fact that the products are manufactured by the franchisor itself.
Having to obey franchisor guidelines prevents franchisees from cutting back on expenses when sales are slow or stagnant. Depending on the franchisor, the business might have to make scheduled “floor payments” all throughout the year. Payments could amount to less than a thousand dollars but that’s a lot of money when you consider how low profit margins for franchises are to begin with. And a struggling franchise could very well have to pay a higher percentage of revenue solely to fulfill the required amount.
National Advertising Doesn’t Always Cut It
With all these deductions and expenses to worry about each month, it’s no surprise that franchises are at least 15% more likely to apply for small business loans than any other industry. Our franchise business loans are designed to prevent franchises from falling behind on bills or postponing necessary growth-related investments that must be taken care of right away. Terms can be adjusted based on the particularly high weekly and/or monthly costs of franchises and would most likely not request significant payments when profits are already on the low side.
Another widely-misunderstood responsibility of franchises is marketing. A portion of sales is deducted for advertisements or promotions, but only on a national scale. In order to raise profits and build a separate revenue stream for growth, franchises must supplement national advertising with their own, local advertising initiatives. This typically consists of pay-per-click campaigns and paid social media ads. But franchise owners are both incredibly busy and low on cash.
A sensible solution is to hire a social engagement specialist or outsource a private digital marketing team with the help of a franchise business loan. Marketing campaigns are long-term investments that might not increase revenue for several months, especially if they aim to promote an upcoming offer or event. But franchise business loans do not have to carry the fixed, monthly payments and rising interest rates of traditional term loans. In fact, the terms can be customized so that your largest payments are made when revenue is doing well, allowing you to continuously grow your business in the months beforehand.
No Industry Is Too Complicated
When we work with a business from a notoriously complicated industry, providing funding is not our only priority. Regardless of how much money they have to spare, these businesses cannot grow without the ability to simplify their goals and tasks. In the case of franchises, our business loans are meant to alleviate the specific cash flow problems that make it unnecessarily difficult to stay current with payments and manage upcoming bills. By the time you make your last payment, you will have developed a business model that follows franchisor guidelines with a little help from your own strategies to ensure maximum efficiency.