I can't open up a franchise-related email, or read a franchise related publication without seeing an assumption that every new franchisee needs to obtain financing. In my humble opinion, this is a very dangerous assumption that needs to be severely questioned.

Make no mistake about it, commercial financing, even SBA financing, is extremely expensive and oftentimes jeopardizes the viability of the franchise. Here's why.

Commercial franchise lending almost always requires a significant up-front fee (called points), plus a security deposit (at zero interest), plus a relatively high rate of interest with a short amortization schedule. In addition, if the franchisee wishes to pay the balance off early, there are often enormous pre-payment penalties. So the franchisee is saddled with 5-10 year debt payments that severely restrict cash-flow during the most vulnerable years that a franchisee is in business. Also, the franchisee is most often required to pledge all their other assets, including homes, stocks, and 401Ks as security for the loan.

I encourage potential franchisees to completely avoid commercial financing for their first franchise. This enables them to focus only on opportunities that they can afford to pay all cash.