Franchise Business Funding Options
The majority of my clients that are seeking to buy a franchise do not have a clear understanding on how they are going to finance their new business and what their options are. And with so much going on with the economy and our business climate due to the pandemic, the options for financing a business seems to be ever-changing.
The most common business financing options include:
- Franchisor In-house Financing
- Small Business Administration (SBA) Loans
- Individual Retirement Account (IRA) or 401K Rollover
- Commercial Loans
- Home Equity Line of Credit (HELOC)
- Unsecured Lines of Credit
WHAT OPTIONS ARE BEST FOR YOU?
I can’t overstate the importance of getting a handle on your funding options for buying a franchise as early as possible in your due diligence process. The financing options that are best for you are going to depend on your financial situation, credit score, employment, and the type of business you are seeking to buy. Banks have tightened up over the past year and the requirements have become more difficult. More and more franchise investors have turned to self-financed options, like cashing out some of their stock portfolio, using retirement funds or home equity to finance their franchise business.
HOW I CAN HELP
I work closely with my clients to understand their situation so I can identify franchise business options that make the most sense for them. Given that, I always want to be sure that whatever franchise I am introducing my client to, is affordable and within the means and capabilities of my clients. When analyzing various franchise opportunities, it is vital you not only understand the “initial” investment, but also account for the capital requirements during the start-up phase and your personal living expenses as you work towards breakeven and profitability.
I pride myself on being a franchise expert, but not a financial expert. And although I have learned a great deal about financing, I leave it up to some of the top industry professionals to guide my clients and help them in securing the financing the need to start and grow their business. I have close relationship with a wide variety of funding resources and am happy to make several referrals based on your situation.
Franchise Fee: $60,000
Locations: 16 open / 100 sold
Franchise Fee: $30,000
Locations: 7 open / 29 sold
Franchise Fee: $49,500
Locations: 29 open / 100 sold
Franchise Fee: $49,500
Locations: 175 open / 632 sold
Franchise Fee: $45,000
Locations: 236 open
FRANCHISOR IN-HOUSE FINANCING
Many franchises offer financing to new franchise owners as a means to alleviate some of the financial burden of starting a business. They often do this as an incentive so the new business owner can have more “working capital” to launch their business. Other incentives franchise companies provide can be in the form of reduced franchise fees, reduced or waived royalties (for a specific period of time), or financing for equipment. Less than 10% of franchises offer this type of franchising and you’ll find that most are home or property service franchises.
SMALL BUSINESS ADMINISTRATION (SBA) LOANS
SBA loans are one of the most common forms of business financing and the rules for this type of loan seem to be changing all the time. With this form of loan, the federal government is guaranteeing the loans and the banks are doing the financing. There are a wide range of banks providing SBA Loans and it is best to work with lenders that have a great deal of experience in franchising.
USING RETIREMENT FUNDS – TAX FREE
For people with substantial retirement funds, whether traditional IRA’s or a 401K, you have an opportunity to use your retirement funds to finance your franchise business. Instead of investing in the market, you would be investing in yourself. If you have an Individual Retirement Account (IRA) or a 401(k) plan from a previous employer worth $30,000 or more, you can “rollover” the money as capital for your new business, without paying taxes or penalties. You are allowed to access these funds with no tax liability, no early-withdrawal penalties and no payback requirement, as long as you adhere to Internal Revenue Service Guidelines (IRS).
Commercial banks and their loan products are another source of financing very common in franchising. If you have a long-term relationship with a local bank it is good to have a discussion with them about the loan products they offer and which may be suitable for your business. Keep in mind, local banks may not too familiar with franchising and not as willing to approve a loan because they can’t often assess the risk of one franchise over another. I always recommend to my clients to check in with their local banks to understand their options, but also check with some of the national lending institutions that are super familiar to franchising. This way you can make sure you are making an informed decision and have analyzed all of the best options to find the one that’s right for you.
HOME EQUITY LINE OF CREDIT (HELOC)
Home Equity Lines of Credit can be obtained through local banks, providing you have sufficient equity in your home. The interest rates for home equity lines of credit tend to be low, but it has been increasingly difficult to obtain this form of financing and just know that there’s a lot of paperwork to complete.
UNSECURED LINE OR CREDIT
If you have a high credit score you may be able to qualify for an unsecured line of credit. These typically range between $25,000 to $100,000 and often can be approved within days and funded in a month. You won’t be required to put up collateral or cash and because it is a line of credit, you are paying a low monthly payment. If you do decide to pay off your credit line, there’s no pre-payment penalties as with other types of financing. You are going to need a very clean credit record with a credit score of at least 700 or more.