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‘Treated like trash,’ young ‘zees win in end


Alfonso Masso (left) and Francisco Burciaga with the van they fought to finance.

Getting financing for a new franchise endeavor isn’t what many would call a fun time. But when you’re lumped in with a group as maligned as millennials, it’s even more of a chore.

Not only do prospective franchisees have to sell the capital provider on the business, but also prove they aren’t just rascals who will spend a business loan on avocado toast and memes.

It’s something that 23-year-old Restoration 1 franchisee Francisco “Franky” Burciaga saw in person when looking for financing for his and his partner’s first van at dealerships in Austin and Waco, Texas.

“To put it nicely, they all treated us like trash,” said Burciaga.  

Burciaga and his partner Alfonso Masso nearly walked right from their college graduation processional to the boardroom of the fire, water and disaster restoration concept Restoration 1.

“Graduation came around and you start asking yourself what’s going to pay the bills now?” said Burciaga, who studied business and entrepreneurship at Baylor University.  “We definitely didn’t want to give up on entrepreneurial dreams, but at the same time, a grassroots startup idea fresh out of college was incredibly risky.”

Of course, walking straight from student life to the bank took a little creativity. While Restoration 1 had financing available, it was—like many internal franchise financing plans—higher interest than they wanted to pay. So to bridge the capital gap and get some money for down payments, they leaned on their network of friends and family.

They were able to get $60,000 in a pair of loans from their families, and eventually found a dealership willing to finance their business-critical work van with a co-signer.

For equipment, having capital on the books helped. But Burciaga said something he learned while training with other new Restoration 1 franchisees made a huge difference. Many of his class of franchisees were seasoned business people and corporate refugees.

Lauren Webster

Lauren Webster went from employee to Sylvan owner, with help from her former boss.

“They all said just walk into a local credit union, tell them your story, tell them the story about Restoration 1. We also discovered it’s way better to go do it in person. It was nice to be able to go in and shake the hand of the person approving the loan,” said Burciaga. “It definitely helped to be a franchise and to come in with some history—this is the CEO, this is what the average franchisee makes.”

In the end they had a $32,000 equipment loan at 25 percent down and a vehicle loan of $31,000 with 20 percent down and the family guarantor.

The piecemeal capital collection was enough to get things going in the Austin market, where the two are now growing. And as they save for a second van, Burciaga thinks it will be a little easier given their positive cash flow.

Help from outside

A little help from your friends (and family) is a great step, according to SBA specialist Charles Yorke, the president of Paragon Bank, an SBA- and franchise-focused bank based in Atlanta.

While it might be contrary to the tired belief that all entrepreneurs are from-nothing, bootstrap-pulling, 10X-ing dynamos, some help from outside is exactly what SBA loan facilitators are looking for.

“They need to have saved or gotten from somewhere … some sort of down payment so they have skin in the game, preferably their own,” said Yorke, noting that borrowers need a little leeway too. “We’re looking for skin in the game, but not for them to put in everything so if there is a hiccup they don’t have additional capital to put in the deal.”

Getting some capital from family and friends is proof of at least a small safety net, and some peace of mind for lenders. Running out of operating capital is the No. 1 reason a business fails. So that safety net is a way to demonstrate the loan won’t default because of something minor.

For those with ability to raise significant initial capital from friends and family, loans guaranteed by the U.S. Small Business Administration are still a good tool for operating capital after opening. With a little operating history, it can be an easier discussion with banks. Loans can help consolidate some financing and return startup capital to friends or family, or flow right into the business.

It’s also a good way to hone the business plan or catch gaps that were missed in the hectic first days. Bryan Atwood, a 28-year-old franchisee in the Toppers Pizza system who just opened his first location, is just now working on his SBA loan. The military veteran tapped into the organization’s veteran benefits to slash his loan origination fees. Going from a 3 percent fee to zero was helpful, but Atwood said the paperwork surrounding the loan was illuminating.

“In my experience, I would go that way. It adds an extra level of scrutiny. They have a lot more requirements than a standard business loan. They want to make sure you’ve thought of this in every way the best case and the absolute worst case scenario,” said Atwood. “It’s forced me to really dig deeper and put some intense thought into it.”

The millennial burden of student loans is another capital threat that can be a major factor in loan considerations.

“Student loans do play into the overall credit decision in terms of global cash flow,” said Yorke. “Do they have enough cash flow to pay the bills, run the household and pay these student loan bills?” That’s especially important in the early days, because “there’s no guaranteed salary in a new franchise.”

Choosing a franchise is obviously at the heart of any franchisee’s planning process. But for younger operators, that sexy new brand might not be the best fit. Older brands are more likely to have a strong training program in place, something Yorke looks at closely when making a decision.

“If there’s less than 50 units, we’re going to really treat that more as an independent business and rely on the experience of the operator. We’d be more apt to provide a loan for a younger person that has a large franchisee unit base because intrinsically they have a better network to help and provide the necessary training,” said Yorke.

“Some of the startups don’t necessarily have the resources to do that.”

Lauren Webster just took over two Sylvan Learning franchises from her former boss. The 26-year-old had some help from her family, but is also going for an SBA loan for some working capital.

She said having that help has been instrumental in going from the education side where she started with the brand to the ownership side.

“I was familiar with the daily activities, but not so much the behind the scenes. To be honest, I don’t know how some people go into it without that help,” said Webster, who added the former owner has stayed on to help through the early days. “I think having that mentor from someone who is willing to be more involved is fantastic. That made things go very smooth.”

Yorke said for young franchisees especially, those types of relationships can be valuable mitigating factors for loan officers.

Six tips for youthful entrepreneurs to gain capital

1. Defer student loans.

The Student Startup Plan allows young franchisees to defer loans if they are interfering with their ability to start a business. It allows young people involved in startups to opt for an income-based repayment plan on federal loans, limiting payments to 15 percent of discretionary income.

2. Borrow from friends and family.

Without a deep credit history, young franchisees need to get some capital. But don’t just ask dad or mom or a wealthy friend for a pile of cash. Bring the business plan to a savvy person in the friend-and-family network and figure out the ideal amount of capital and the repayment terms.

3.Consider crowd-funding.

If the concept is fun and you have the marketing prowess to do it, crowd-funding can be a great source of some or all the startup capital required. But it might not work for the not-so-sexy franchises.

4. Try peer-to-peer lending.

Those without a network can lean on other options. Peer-to-peer (P2P) lending connects borrowers and investors directly through online services. Generally, these sources are ideal for working capital and require a little operating history. But be wary about the interest rates—they are generally higher than traditional loans, a premium for the convenience. And having such a loan on the books makes it harder to get traditional financing down the road.

5. Avoid over-investing.

Start smart. When it’s just you and a partner, the cushy break room and complimentary avocado toast can wait. Cutting unnecessary expenses out of the loan application will give lenders less to worry about when making a decision.

6. Choose the tried-and-true.

Young franchisees often want the popular brands that are as young as themselves, but lenders treat emerging franchises like an individual business with a riskier profile and thus a more difficult sell to get a loan. A better option, lenders say, is choosing a brand with a longer track record and multiple units in the portfolio, so borrowers can feel more confident of the numbers.

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