When Rick Kimsey decided to start a business, a franchise seemed like the best way to go.
Buying a franchise - in his case, a Doctors Express urgent care facility - meant he didn't have to start from square one. The business came with a concept and a service to sell. Urgent care centers treat a range of common non-life-threatening medical conditions, usually without an appointment.
But what sounded like a great plan wasn't so easy. Financing for the business was nearly impossible to get in the aftermath of the 2008 financial crisis and the recession. Kimsey was dealt his first blow when his bank froze his home equity line of credit. Then six banks turned him down for a loan.
"The rug was pulled out from under me," says Kimsey, of Sarasota, Fla. It took more than a year before he was able to close the deal.
The tough economy has made the prospect of operating a franchise attractive to the unemployed, to workers who don't want to wait to get knocked off the corporate ladder and to others looking for a new way to generate income.
But first-time franchise buyers are finding it's harder than they expected to cobble together the money needed to get their businesses off the ground. Lenders are rejecting them because of their inexperience or because the franchises they're buying are relatively young and not as well-known as established brands such as McDonald's and Jiffy Lube.
reasons for rejection
Kimsey was attracted to Doctors Express because health care is one of the fastest growing franchise segments. He had money saved for a $55,000 payment, known as the franchise fee, to the parent company. He needed $1.2 million to cover between $250,000 and $300,000 in construction costs, $150,000 for equipment and the remainder for working capital.
The banks that rejected his loan application gave similar reasons, he says. "It's a fairly new franchise. This isn't McDonald's, so we don't have 70 years of history," Kimsey says. Doctors Express was founded in 2005 and has 54 locations.
Even though the company doesn't require that franchisees have medical training, the banks were uncomfortable with the idea, although they liked his business plan.
There was more: "We don't have a lot of assets. It's not like I have a million-dollar CAT scan" that could be used as collateral, he says. He leases the building and equipment.
Eventually Kimsey did get a $575,000 Small Business Administration-guaranteed loan from a bank in Utah. He tapped into his savings and about $500,000 from his 401(k) - the entire account - for the rest of the money.
"I've got to build this up. It will be my retirement," Kimsey says of his franchise.
Number of franchises down
Franchises have suffered along with other small businesses in the last five years.
The number of franchises in the U.S. - for example, an individual McDonald's, Dunkin' Donuts shop or Days Inn - fell by 37,790, or nearly 5 percent, between 2008 and 2011, according to the International Franchise Association.
The trade group estimates that the number of franchises will rise this year for the first time since 2008, gaining 1.7 percent to 748,680. But that's still more than 3 percent below 2008's 774,016.
The number of franchises dropped as the recession made many people wary about starting a business and because thousands of franchises closed, among them auto dealerships, real estate brokerages and high-end restaurant franchises.
"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.
But banks are also wary about franchises they're unfamiliar with - the problem that Kimsey ran into. That's a huge change from before the recession.
"Prior to 2008, there was the general view of franchisees and the lending community that franchising was a fairly sound bet," says Darrell Johnson, CEO of FRANData, a research firm. "The rising economic tide would float all boats, and one brand might not be as strong as another, but everyone was going to do OK."
Now lenders are asking more questions about the brand, Johnson says. That's happening even in some of the franchise industries that are most popular now, including health care, elderly care and gyms and other fitness companies.
"The credit score that used to guarantee a loan doesn't anymore," says Peter Ross, CEO of Senior Helpers, which has 300 franchises that provide in-home care to the elderly. As a result, "people have to be a lot more creative" to raise money to buy a franchise.
He sees more buyers tapping their 401(k) accounts.
Most of the successful buyers tend to be those who already own franchises and have a credit history. Private equity firms that have their own money are also buying.
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