Loans R Us

While most of the news in the Wall Street Journal this week was pretty bleak, a small business feature on franchising opportunities talked about an innovative financing idea.  The gist of the piece is because small business lending is so hard to get now, franchising companies are including a service to help you get financing as part of their deal.  According to the article, assisting putting the right borrower with the right lender really makes a difference.  They cite an example of a home health care franchise that was finding less than 10% of their new franchisees could get financing.  Now that they have a program together, they are finding 75% of their applicants can get funding.

While this is good news, it also reminded me that people looking for opportunities beyond their current job (or unemployment) should make sure to consider the details of what it will really take.  I’m going to excerpt a wonderful example here from a blog called Flock Free Nation

Bob has a job where he earns $50,000 a year. He wants to be his own boss so he buys one of the smaller fast food franchises where he takes home $50,000 in profits every year. He is his own boss and he makes the same income as before. Sounds good right? Not so fast.

To have a business where he earns that same $50,000 he had to:

• Pay a franchise fee of approximately $25,000
• Pay $150,000 for equipment and leasehold improvements
• Pay $20,000 for inventory and working capital

The post goes on to point out that while Bob is financing all this, the point of leverage is supposed to be that it earns you a return.  He’s still working the same (let’s face it -- more) hours and he’s getting the same salary.  Now though, he’s got an increase in both risk and expenses.  That said, he’s presumably doing work he finds more rewarding.  The other possibility is that as he gets the hang of running the business, the math will improve.  My suggestion is to at least do this type of math up front, so you’re clear on what you’re really getting into.

My college roommate left a job to run her own company.  She’s doing really well given that it’s a new business and the economy is terrible. She is definitely engaged in a way that she never was in her old job.  However, even she admitted to me, “It’s like the difference between falling in love and being in the relationship.  Now I’m starting to see the flaws…”