Finding funding for your first franchise can be a challenge. Even if you invest in a lower-cost franchise, not many first-time franchisees have the net worth or liquid assets to purchase their business outright. Fortunately, there are tons of ways you can raise or borrow the money needed for your foray into ownership – and some useful strategies for making sure you get as much funding as you need to make your business a success.
Begin at the beginning.
Before you choose a franchise to partner with, before you even begin to shop for your ideal franchise, it’s a good idea to determine your current net worth. Often, franchisors calculate a minimum net worth and value in liquid assets based on building and purchasing costs and won’t bring on anyone who doesn’t meet those financial qualifications.
To find your net worth, subtract your total liabilities (debts) from your total assets (the value of what you own). The number you’re left with is your net worth.
Assets
- Cash, including checking and savings accounts
- Vehicles, whether paid off in full or not
- Real estate (at current market value)
- Bonds and securities
- Any other holdings
Liabilities
- Outstanding bills, including credit card debt
- Mortgage(s)
- Auto or bank loans
Once you have an idea of your net worth, you’ll be able to make a decision about the investment level you can afford and are comfortable with, and what kind of funding you’ll need to cover additional or unexpected costs. Remember: the listed price of a franchise doesn’t necessarily include the cost of the business. You may need to pay additional fees for real estate and construction, signage, fixtures and other hardware, equipment and inventory and operational costs like marketing, training, wages or commissions. For many aspiring business owners, there’s no way around having to find more money to get their business going.
Try talking to the franchisor before seeking funds elsewhere.
Before you explore other sources, work with the franchisor to find out what kind of financing options are available to you. Because a franchisor’s goal is to expand their business, they’ll typically jump through hoops to bring you on board, especially if your credit history looks good and you meet their financial qualifications. In most cases, franchisors have an established process for financial assistance, including preferred funding partners.
What kind of help can you expect from the franchisor?
Many franchisors will agree to finance part of the cost of the franchise, including:
- Franchise fee
- Equipment
- Operational costs
Some franchisors carry all or part of a loan through a preferred finance company. Loans through your franchisor can come with crucial benefits, like
- Simple interest
- No principal
- No required payment for 12 months
Franchisors can help keep startup costs low by taking advantage of relationships with leasing companies and vendors
In some cases, franchisors help new franchisees by reducing the royalty or annual fees for the first one to three years of business
Getting funding is an exercise in risk management and tolerance.
After you’ve found your maximum budget based on your personal assets, it’s a good idea to turn to your friends and family for a hand with funding – they can be incredibly valuable resources and a potentially interest-free way to increase your starting capital. After that, you’ve got a number of options available with varying degrees of risk. We’ll walk you through some of the more popular avenues for securing funding.
SBA Loans
One of the most common routes for novice franchisees to get the proper funding is a loan guaranteed by the Small Business Administration. The SBA doesn’t disperse loans directly to the borrower. Instead, they approve loan applications forwarded to them by an authorized lender – usually a bank. The SBA backs certain loans intended to start and grow small businesses up to 90%, minimizing the financial risk both for you, the borrow and future business owner, as well as the lender.
The SBA is strict about who they accept, so the process can be tricky. But if they accept your application, you’ll likely see lower interest rates, lower down payments, lower payments and more flexible terms than standard lenders on loans up to $5,000,000.
Retirement Rollover
A fast, debt-free funding solution like rolling over a 401(k) or IRA is generally ideal – especially one without penalties or taxes. Because you’re using your own money and not taking on debt, you can pay yourself a salary from the start, and not having to worry about interest or loan payments can help bring your business to net positive sooner. Be cautious – rolling over the funds you’ve saved for retirement is risky if you are not confident in your business concept. This is why so many entrepreneurs turn to franchising – it helps alleviate some of the risk by giving franchisees a proven business model and a better chance of success.
Rolling over retirement funds is essentially a process of reallocating your investments from your current holdings to your own company. Despite how simple it sounds, the process can be pretty complex and might require an experienced third party to ensure it goes smoothly. Keep in mind, too, that unless you have more than $50,000 in your retirement fund, this may not be a viable option for you.
Home Equity Loan
Leveraging your most significant asset is remains a fairly common option for entrepreneurs in need of start-up capital – but losing your home is a serious risk if you can’t make your loan payments. That in mind, a home equity loan is comparatively easier to acquire over other loan types. If you do decide on a home equity loan, you have two options:
Standard Home Equity Loan
This works like a mortgage – you borrow a large sum and make fixed monthly payments with interest that’s likely tax-deductible.
Home Equity Line of Credit
This type of loan gives you access to smaller funds as you need them up to a fixed amount determined before you sign for it.
Securities-Backed Line of Credit
As long as they're not part of a qualified retirement plan, you can also leverage assets like stocks, bonds and mutual funds to secure a loan. A securities-backed line of credit allows you to access funding based on the value of your portfolio without having to liquidate those assets. It’s a clever solution to both take advantage of and maintain your long-term investments – and, start to finish, the approval and distribution process typically takes fewer than 10 days.
Some food for thought.
Whether they’re angel investors, FDIC insured banks or your own sibling, it’s important to ensure you’re fully equipped when you’re approaching lenders for a loan. Know the ins and outs of your business plan, the model of the franchise you’re investing in, past and current market trends and future projections. Have an answer for every feasible question a lender could ask you during the application process.
What are lenders looking for?
Lenders are most interested in providing funding when it’s least risky for them. That means you’ll have to prove to them that you’ve got stable income, strong credit history and predictable – if not stable – lifestyle habits.
You don’t have to have a six-figure income for a lender to approve your loan application, but your record should show that you live comfortably within your means – if you’re smart with money in your personal life, you’re more likely to carry that into your professional life. This is why lenders also look into history of residence and employment. They want to know you aren’t likely to skip town and can keep a steady job to reassure them you’ll be able to pay back the loan.
You can do this.
It’s a lot to take in, we know. But you’re doing yourself a huge service by putting time and energy into researching your investment. If you have any other questions about funding or franchising, don’t hesitate to reach out and ask.
