The Cash Trap: How a Startup Franchise Owner Learned the Hard Way About Business Financing
When John and Lisa Martinez sold their home in California for nearly $1.2 million, they felt like they were making the smartest move of their lives. Tired of the high cost of living, endless traffic, and rising taxes, they decided to head to Texas, where they could pursue their dream of owning a business. After months of research, they invested nearly every dollar they had into buying a franchise of a popular fast-casual restaurant chain.
They thought they were doing everything right. They had the capital, the enthusiasm, and a business model that had proven successful elsewhere. What could possibly go wrong?
The mistake wasn’t in their choice of business — it was in how they handled their cash.
Instead of using a portion of their sale proceeds as a down payment and seeking financing for the rest, John and Lisa paid everything upfront: the franchise fee, the build-out, the equipment, the initial inventory, and even the first few months of operating expenses. They wanted to avoid debt, believing it would make their business healthier.
For the first few months, everything looked good. Sales were steady. Customers loved the food. They were breaking even — even pulling a small salary. But about a year in, they saw an opportunity: a second location just a few miles away became available. The expansion made perfect sense — same customer base, brand recognition was growing, and they had operational experience under their belt.
Excited, John and Lisa went to the bank to ask for a loan to fund the second location.
That’s when reality hit them like a brick wall.
The bank, polite but firm, explained that John and Lisa weren’t ready for expansion financing.
They needed to show:
- Two years of successful operating history
- Full year-end Profit & Loss statements
- Corporate and personal tax returns demonstrating profitability
- A business debt schedule
- Strong cash flow sufficient to cover the new debt payments
They didn’t have it.
At barely twelve months in, the business had positive momentum but no true track record. Without two full years of tax returns showing solid profits, no traditional lender would offer them the cash they needed to grow.
Even worse, because they had spent all of their available personal cash up front, they had no reserves left to bootstrap the second location themselves.
The very money they could have used to secure their expansion — or survive a rough patch — had been tied up completely at the beginning, leaving them no flexibility.
The Lesson: Secure Financing Before You Need It
What John and Lisa didn’t realize is what many new entrepreneurs and franchisees overlook: cash is king, but liquidity is everything.
When you start a business — whether it’s a small independent operation or a franchise — you should aim to preserve as much of your personal capital as possible.
The smartest path is often to:
- Use a loan or financing to fund the bulk of the startup costs.
- Keep your personal cash as working capital reserves.
- Use financing as a tool, not a burden — so that you have flexibility to expand, survive unexpected costs, or cover slow seasons.
Banks are much more willing to lend to a borrower before the business opens or in the first months of operation, when projections and personal financial strength are still the basis of approval. Once you’ve launched and are operating, lenders shift to requiring historical performance — typically two full years — to consider you for financing.
John and Lisa’s story isn’t unique. It’s one of the number one mistakes startups and franchisees make: thinking that paying cash up front is the “safe” route. In reality, it often leaves them stuck — unable to grow, vulnerable to unexpected challenges, and without the cash cushion every business needs.
If you’re starting a business or buying a franchise, remember:
Get financing early, even if you don’t think you “need” it. Your future self — and your future business — will thank you.
Give us a call today to discuss your commercial finance needs or get started by filling out this form!
Karen Schimpf
(512) 358-1511
karen@applycommercialloans.com
www.ApplyCommercialLoans.com  Â
P.S. We now have a FAST close business-only loan of up to $500,000. IT is an SBA loan so it has the longer amortization and lower payment and we can close in less than 30 days. We just need 2 years of your business tax returns, credit and a personal financial statement to get a quick approval. Give us a call today to discuss your loan scenario at 512-358-1511 or click here.