Article

Funding your pizza franchise in 2016

Wouldn't it be great if your franchise funding options were as tasty as the pizza you believe in?

February 29, 2016

By Brendon Dibella, VP, Development & Strategy, StreetShares

Wouldn't it be great if your franchise funding options were as tasty as the pizza you believe in? 

Although the world of pizza franchising is an exciting and rewarding one, most every franchisee faces a need for funding at some point: whether it is starting that first location, expanding it, renovating it, or acquiring others.

Many of the funding options that exist for franchisees are old standbys. But the lending market has been anything but boring in recent years. So, it is worthwhile to spend a few moments to determine what options exist both old and new and what the important considerations are depending on a franchisee's needs.

Review: banks are usually the least expensive borrowing option. 

And it makes sense since their cost of capital is so low. So, why bother to cover any other options in an article like this? Because banks are often not as helpful in making smaller loans if that is your particular need. 

If one is in need of larger amounts from the bank, fortunately there is the SBA and its commonly used 7(a) loan program. It is key to remember that the SBA does not extend actual loans itself. Instead, it is guaranteeing your loan through the bank providing it. Be forewarned that receiving funds via an SBA loan can take some time. Be aware.

Franchisors often have approved lenders or special programs.

Always examine what programs the franchisers offer to help you get off the ground or aid with ongoing needs: equipment replacement, acquiring other sites, etc. It is not unusual for large and established franchisers to have special financial institutions or in-house programs to make financing easy or attractive. And not surprisingly, many franchisers have online applications available with their partners.

The alternative of alternative lenders.

Just what is "alternative lending"? Alternative lenders are online platforms that arose in the wake of fewer community banks and larger banks exiting the smaller loan market. They employ technology to make applications and decisions fast. Funding is also fast. But costs can vary depending on the lender as the trade-off to receive the funding quickly. 

We use "social lending" where investors compete to fund loans up to $100K. Many alternative lenders like ourselves like to see some time in business first, so this is not always the best option for the franchisee just starting out without any revenue yet. An exception is ApplePie Capital which advertises working with new franchisees. 

Understand how to compare your options.

Remember that funding can take different forms: term loans, lines of credit, and specialized equipment financing. Understand the differences and trade-offs. Also ensure you understand how frequently you are making payments and how the provider is collecting. The last thing you would want to happen is accepting a finance option that is overwhelming in its payment structure.

Not unlike the variety of funding sources, there is a variety of ways to quote funding (which does not always work to the franchisee's advantage). Although most feel that quoting annual percentage rates or APRs is the most transparent means, some providers will try to quote "factor rates," which sound low but are computed differently than an APR. Never assume that the terms "interest rate, factor rate, or APR" are inter-changeable. They are not.