In the aftermath of the 2008 financial crisis, it has been nearly impossible to get financing for a business. Having a plan to buy a franchise wasn’t as easy as Rick Kimsey thought it would be when he decided to buy a Doctors Express urgent care facility. The business had a concept and a service to sell, but the fact that he wasn’t a doctor brought shocking blows to him.
Six banks turned Kimsey down for a loan after his bank froze his home equity line of credit.
“The rug was pulled out from under me,” Kimsey says. It was more than a year before he was able to close the deal on the franchise.
Like Kimsey, the tough economy has made people want to operate a franchise, especially those who are looking for a new way to make money or don’t want to get mixed up in the corporate world. But first-time franchise buyers are finding out that it’s much harder than expected to get their businesses off the ground.
The financing just isn’t available for those wanting to open a franchise, especially a smaller or less known business. Lenders are rejecting their applications for loans because they are inexperienced or because the franchises are especially young and aren’t McDonald’s or Jiffy Lube.
In Kimsey’s case, he saved $55,000 for a franchise fee from his own money. After getting the approval to open the franchise in Sarasota, Florida, he still needed $1.2 million to cover construction costs, equipment, and more. Six banks rejected his loan application, and all gave similar reasons for saying no. “It’s a fairly new franchise. This isn’t McDonald’s, so we don’t have 70 years of history,” Kimsey says.
Eventually, Kimsey did get a $575,000 Small Business Administration-guaranteed loan from a Utah bank. He had to use his savings and about $500,000 from his 401K for the rest of the funds. “I’ve got to build this up. It will be my retirement,” Kimsey says of his franchise. “Then I’ll hand it over to my children.”
The number of franchises dropped 5% between 2008 and 2011, making many people weary about starting a small business or franchise. A good credit score no longer guarantees a loan because lenders are asking more questions about the brand.
“Where it’s really having its hardest effect is the aspiring entrepreneur who doesn’t have that track record or that relationship with the banks,” says Stephen Caldeira, president of the International Franchise Association.