To Buy a Franchise, You Can Use Your Savings, Get a Personal Loan, Qualify for a Bank Loan, and More
By investing in a franchise, you are getting your piece of a booming industry. According to the International Franchise Association’s (IFA) Economic Forecast, franchises support about 8.2 million jobs and comprise 3% of the Gross Domestic Product. But some can find it difficult to open a business without adequate funding. Whether you are investing in an emerging or established brand, there are funding options out there for you. These include:
- Equity funding or angel investors
- Debt funding or credit cards
- Self-Funding with cash
- Asset-backed lending, such as a pension
- Home Equity Loan or Line of Credit
- Signature loans
- Equipment leasing
- Securities-backed loan
Why Talk About Funding?
It is important for you to talk about funding with a franchise consultant because it can mitigate your fear and take the topic of money off the table. It will also allow you to spend more time investigating brands that you can realistically invest in.
Reputation in the Lending Community
According to industry professionals like the ones at FranFund, emerging franchisors benefit from franchise owners who have sufficient capital and a good financial background. To help an emerging brand establish a good reputation, 20 franchisees in the new system have to validate well. The franchisor will have a bad reputation if franchise owners default on their U.S. Small Business Administration (SBA) loans.
If you default on your SBA loan, that is viewed as your responsibility along with the franchisor’s. The lending available will be based on the total project cost, which includes the franchise fee, licenses, marketing, equipment, and more. Since established brands have national and regional reputations, emerging brands need to bring financially strong borrowers forward to compensate for the lack of name recognition.
In order to encourage borrowers to consider riskier loans, the SBA provides them with a guarantee. As a general rule, these lenders think that first-time business owners and new brands are risky. The lender wants to be comfortable and confident that you are able to pay them back. The SBA works with lenders to offer loans, such as SBA 7(a) loans or SBA Express loans, for acquisitions, startups, and more. The loans will be available in values of up to $5 million.
401(K) or IRA Rollover Loans
When you utilize a rollover program, you have access to your retirement savings that are tax-deferred and penalty-free and can be used to invest in a business. This is called Rollover for Small Business Startup by the Internal Revenue Service. When the transaction is completed, your new business now has cash to use for any business expense. Your new retirement plan will also have shares of stock that are equal to your initial investment.
If this option is your entire business strategy, this means that you’ll break even sooner since you’re opening the business with little to no debt. But keep in mind that you can pair this rollover program with a business loan for the down payment. Be sure to look at the IRS’ regulations regarding this program.
Another way to fund your franchise business is through a home equity loan or home equity line of credit (HELOC). But these are two different things. For example, a home equity loan is a lump sum that is paid off over time with a certain number of payments at a fixed rate. On the other hand, a HELOC has a revolving balance, making it more like a credit card. This type of strategy is especially good for freelancers and consultants because they can borrow when they need to, and they can even out their earnings. This means that they can pay the loan when they are able to and borrow up to their credit limit when necessary.
An angel investor provides the funding that you need to open your franchise business. These investors have a large amount of capital to invest in your business. Using their knowledge of how to open a franchise, these investors will scrutinize your franchise business plan and work with you if they believe in your idea. An added benefit of working with an angel investor is that they will provide mentorship to entrepreneurs who want to open a franchise. Additionally, they will take risk on your franchise business as they are looking for a high return on their investment.
Another strategy for funding your franchise business is venture capital. This business strategy allows you to sell a percentage of your business to a venture capitalist in exchange for capital. The capital can also come from investment banks or other financial institutions. To the investor, this is a high-risk investment, so an entrepreneur who wants to open a franchise must keep in mind that they could potentially lose the capital if the business doesn’t succeed. Owning a franchise can be a costly investment, so obtaining venture capital could be a great funding strategy for your small franchise business.
Taking on a Partner
A form of equity funding is taking on a partner or partners. When you take on a partner, you are giving up a portion of your control of the franchise business for funding. To ensure a successful partnership, you and your partner(s) should be in agreement on the direction of the franchise business and what will make it the most profitable franchises out there.
A debt funding strategy for your franchise business is credit cards. You can use this strategy if you are unable to obtain investment funds or get a loan from a bank. While the interest rate on a credit card is typically higher than the one on a loan, you may find it easier to obtain a credit card than a loan.
Funding and Franchise Consultants
There are pre-approval tools that you can find online that will allow you to input important information, including your credit score, available cash and more. This will tell you a funding amount that you qualify for. You can get a quality pre-qualification and assessment from a franchise consultant, who will work with you and help you find funding options to invest in the right franchise.
Not only will these professionals help you understand how to open a franchise, but they will work with you to find ideal franchising opportunities based on your skills, goals, and financial background. At no cost to you, they will give you guidance and help you find franchise businesses where you fit in and will likely succeed. From the franchise cost to narrowing down your list of the top franchises to own, franchise consultants will make the discovery process as straightforward as possible.