Restaurant Franchise Financing

If you have decided that a restaurant franchise is the way to go then often the next step is figuring out how to pay for it.

The first hurdle you will run into is that many franchise systems have requirements in place which you must meet in order to be able to buy in at all. The reason for this is that since undercapitalization is a major cause of restaurant failure, and failures make their brand look bad, they want to make sure you are bringing enough cash to the table.

Commonly there are two requirements, one for total net worth and the other for liquid acpital. Net worth is the total value of your asssets (home, stocks, cash, vehicles, etc.) minus the total of your debts (mortgage, credit cards, car payments, student loans, etc.). If the requirement is for a $500K net worth then you need to have assets that total at least $500K more than the sum of your debts.

The liquid capital requirement is equally important- this is the amount of cash you can put your hands on now or in the next month or less. This means that even if you own a $1 million dollar home, mortgage free, if you only have $10,000 in the bank you wouldn't meet a $100K liquidity requirement even though you have substantially more than that in net worth. If you had no other debt, and an income, you could probably borrow the cash in that situation. In cases however where your assets are not liquid you may run into problems meeting the requirement.

One option is if you have a significant chunk of assets in a retirement account which is technically liquid but normally untouchable, you can use that, without incurring penalties for withdrawl, if you set up a corporation and invest your retirement plan in your corporation, which then buys the business. There are specialists dedicated to setting these types of deals up and while they may cost several thousand dollars it may be the only way in some cases to access your funds to reac a liquidity requirement.

Beyond your own personal finances, you have different options depending on the franchise. For more established brands, a bank loan is usually an option, often through the SBA program. Depending on your financial health, you may also be able to arrange financing for yourself just based on yuor own assets and credit.

For less well known franchises a bank loan may be harder to get (since they dont' consider the franchise much less risky than an independent restaurant), especially if your own financial record is less than perfect.

Some franchises have set up specific financing deals with third parties. Some also will help arrnage lease financing for buying the equipment, furniture, fixtures, etc. They may also be able to help you arrange construction financing for the buildout of the space.

Many franchises will allow you to pay part of the franchise fee over time rather than all upfront.

Keep in mind, the more debt you pile on, the longer it will take to reach break even and the harder you will have to work each month to show a profit.

While you are investigating a particular concept, be sure to ask the individual franchisees where they got their funding. They may be able to turn you on to some sources familair with the franchise who will be more apt to work with you as well. Also be sure to ask what their total cost to start was so you have a better idea of what you will realistically need to have available to launch. And, don't forget to compare their expenses for things like their lease and buildout costs with your own- they may live in a lower or higher cost area of the country which will skew your idea of what you will need.

If you have tapped all the sources and still come up short, you have the usual options as any other entrepreneur:

If you go down any of these routes, be sure you have everything in writing and the whole thing is crystal clear with everyone before you accept a dime. Otherwise the whole thing can unravel pretty fast in the event something unexpected comes up.

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