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While some economic indicators and a soaring stock market point to a slow recovery of the U.S. economy, the days of easy credit for financing a small business dried up when the recession hit in 2008.
Last year, the Small Business Administration analyzed data on small business lending collected by U.S. banking regulators that showed the toll the poor economy has taken on small business. Bank lending fell from a peak of $659 billion in June 2008 to just $543 billion in June 2011—a decline of $116 billion or almost 18 percent. And the decline in bank lending has affected small businesses more than it has larger firms.
“Entrepreneurs have a hard time trying to find capital,” says Stephen Sheinbaum, president and CEO of Merchant Cash and Capital LLC. “Banks are being very, very conservative about who they are giving money to.”
Franchises Offer Less Risk
With a strong parent company behind them, a recognized brand, and proven business model, franchisees obtain a financing advantage over mom and pops when they partner with a franchise, said Sheinbaum. He was a panelist during the 2013 California Franchise Lending Conference in July. Titled “Franchise Lending—Why Smart Lenders See a Path to Less Risk,” the panel addressed several topics, including why financing a franchise presents less risk than a typical small business.
“MCC has always had a keen eye on the franchise sector and back in February of 2012 we established a special Franchise Financing Division to specifically address their needs,” Sheinbaum said. “We need to be there for the franchise industry with innovative financing options where and when they are needed.”
Merchant Cash and Capital is one of the lenders in the cash advance industry, serving as a financing alternative for franchises. Sheinbaum founded it in 2005, prior to the great recession, and his company has grown, while other lenders failed to weather the crunching economic climate.
“Franchises are a great niche for us,” he said “We have another party—the franchisor—who is vetting the merchant for us. The biggest risk we have is the type of person we are working with.”
MCC offers a variety of lending products with a streamlined approval process and works especially with multi-unit franchisees who want to leverage their business experience and secure financing for opening their second, third, or more locations.
Good Credit is Crucial
Sheinbaum also offers advice to potential franchisees who are doing due diligence and trying to secure financing for their first franchise operation. He suggests working to make sure your personal credit is stellar. Applicants will also need to show three years’ of business financials (if they already own another business), a positive income, and they will need hard collateral.
Lending experts see more financing options for franchisees with good credit, enough cash, and the patience to ride out a lengthy approval process. And they might have more resources at their disposal, depending upon which franchise system they choose.
“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,” according to the Wall Street Journal. “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.”
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