Financing Mythbusters!

As a franchisee, you may boast a keen intuition about your franchise businesses, a clear understanding of the markets that move it as well as a cool finger on the pulse of your industry. However, with many franchisees, when it comes to the capital they need to grow, many still unfortunately have a lot to learn.

According to a spring survey of small-business owners, many franchisees have a number of misconceptions about basic financing terms and the strategies that will put cash in their reserves.

Therefore, here are a few common financing myths that all franchisees need to be aware of:

1. Financial credit options are all similar or identical

According to one study, over a third of survey respondents believed a term loan and line of credit was basically the same thing. However, this is a fatal mistake to make that could lead them to the wrong financial tool, and possibly to debt they cannot afford.

A term loan capitalizes a specific asset for a specific period of time. Therefore, you want to match the loan to the life of the asset you are buying. For example, if you knew you were remodeling a space that had a 6 year life, then you would want a 6 year loan to match that depreciation. On the other hand, a line of credit is a revolving finance tool you can tap as needed. The lender sets a maximum amount of funds it will make available, and interest typically accumulates only when you make use of the funds. Its quick availability makes it ideal for short-term cash-flow needs.

2. My bank will save me

Many franchisees believe that banks commonly make loans to loyal customers in the midst of a cash-flow crisis. It is not entirely false but it depends on the reason for the crisis. For instance, if it is an issue of approaching bankruptcy, or not generating the revenue, that is exactly the kind of cash flow the banks are concerned about and they will most probably not grant any credit. On the other hand, if the sudden need is a result of rapid growth, revved-up receivables and a demand for more inventories or a new warehouse to accommodate the expanding customer list, those are known by banks as positive cash-flow crunches and are consistent with growing the business. Therefore, before franchisees undertake any significant growth plans, they need to discuss them with their banker to avoid any surprises.

3. Obtain loans from as many lenders as possible

Another common myth many franchisees have is that it makes good business sense to cast a wide net by applying for loans with as many lenders as possible. This many sound logical to you, yet, remember that every request you make for credit shows up on your credit report. It is better to limit your inquiries to a small set of financial institutions at a time.

4. More money can fix whatever is wrong with my franchise business

Perhaps one of the biggest frustrations for you is needing more money to grow your business and having difficulty finding it. In some cases that need is legitimate. However, all too often business owners think more cash can wind up their slow business. They oversimplify the problem and focus on needing more money when, in fact, they really have not done a good enough job assessing what their business is, what the target markets are and how their franchise business is running. Many franchisees also tend to focus on fast growth as a remedy, even when higher sales at the wrong price point can lead to a loss. Growth is good, but you have to grow strategically.

Make sure you do not hold any of these myths. If you need help, speak to your franchisor, franchise accountant and advisor. They can help you set things straight.

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