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Decoding the Franchise Disclosure Document From A to Z – Item #10

Last week, we examined your obligations as a franchisee. The do’s and don’ts of your relationship with the franchise, and what you are and are not allowed to do in order to keep your good standing with the franchise. Items #10 and 11, then, reverse the roles and discuss the franchisor’s responsibilities to you. To begin, Item #10 will cover the franchisor’s financing options.

Each franchise has its own rules and preferences, so don’t automatically assume that you can get your financing from your favorite bank.

What you’ll learn:
• The franchises preferred financing options, including:

  • Whether or not the franchise offers an in-house financing program
  • Their preferences on securing your own financing through your lender of choice
  • Deals or agreements they have with specific outside lenders, and
  • Any special relationship the franchise has with those outside lenders

Why is this important?

First of all, keep in mind that franchises are not required to provide in-house financing; they are only required to tell you what their preferences are. Don’t skip over this step because some franchises are very, very specific about where and how they want you to acquire your funding.

Second, it’s important to know that financing a franchise is not the same as financing any other type of business. Fortunately, it can actually be quite a bit easier in some regards.

In-house franchise financing can offer a number of benefits. For one, they often defer the initial franchising fee when you finance through them. (See Item #5) This can save you quite a bit of money up-front. However, look out for high interest rates.

Most franchises will at least provide you with a list of preferred lenders, both bank and non-bank. Sometimes, these are simply institutions that they have a good history and rapport with. Other times, the association goes much deeper. If they have any type of relationship with a preferred outside lender, they are required to describe it in Item #10. Be on the lookout for lenders that own the franchise or share board or executive members. This could be a conflict of interest and get you tightly entangled in a messy web of deceit or fraud. On the other hand, many of these relationships are completely legit and can offer some real advantages, such as looser qualification requirements, smaller down payments, or lower interest rates.

Finally, when it comes to financing through your bank of choice, the process can actually be rather smooth, assuming you have all your paperwork in order. That’s because banks often like the proven track-record and sustainability of some franchise models. In other words, franchises are generally considered to be a much lower risk; at least in the banks opinion. When choosing a franchise, keep in mind that banks prefer models with more locations, popular brand names, and longer records of consistent profits. So, while banks do love a good franchise, not all franchises are created equal when it comes to getting funded.

The bottom line is that #10 spells out all of your financing options. Every franchise is different, with some being more helpful than others, some being lose with the rules, and others being very strict and limiting with your choices. Read through this carefully and never get caught up with a franchise whose financing feels uncomfortable to you. Choose one that fits your money style and makes you feel supported, not dictated, and secure but not controlled.

Next week, we’ll continue our review of the franchisor’s obligations to you, in Item #11.