FRANCHISE FUNDING FAQS
Have questions on franchise funding? We have the answers…
Q: At what point in the process after I decide I want to pursue franchise ownership do I need to start looking for funding?
A: The sooner the better. It is usually a good idea to start figuring out how you will be funding your business venture as early in the process as you can. Some funding options take time and you don’t want to miss out on an opportunity because of funding delays or issues.
Q: I keep hearing about pre-qualification. What exactly is it and does it make sense for me to pre-qualify for funding?
A: This is similar to what you would do to pre-qualify for a mortgage to purchase a home, except you’re pre-qualifying for a loan to buy a business. There are many different types of pre-qualification options available from various providers. Some tell you only if you qualify for funding, others go a step further and tell you how much funding you qualify for so you know what franchise investment level you can buy into. Some provide your credit and SBSS (small business scoring system) to determine if you’re SBA eligible, some don’t. Some are free, others charge a fee. Some require you fill out an automated form online, others provide you with access to speak directly with a funding expert. Keeping this in mind, it is highly recommended you pre-qualify so you can make more informed business decisions. You should also do your research to determine which pre-qualification resource is the right fit for you.
Q: Do you always need capital when securing a loan?
A: It’s relatively rare to find banks that offer loans unsecured by capital. Most require 20-30% capital injection.
Q: Can the choice of franchise have an impact on my funding options?
A: Yes, in fact, it can. A franchise system with a strong brand name, several locations, and a solid track record is looked upon more favorably by banks than one that doesn’t have those things. However, for some methods of funding like 401(k)/IRA Rollover Funding (ROBS), it doesn’t matter since you’re bypassing the need for a loan and funding right out of your retirement funds.
Q: What is the SBA Franchise Registry, and what does it mean if the franchise I’m interested in isn’t on the list?
A: The SBA Franchise Registry is a list of franchise systems whose franchise agreements have already been vetted by the SBA, so their potential franchisee candidates are considered small business eligible for SBA financing. The franchisor’s participation is voluntary, and absence on the list doesn’t mean it isn’t endorsed by the SBA. It simply means that if a franchisor is on the list, their candidates’ loan applications can be reviewed and processed more expediently.
Q: If I have poor credit, what are my funding options?
A: There are a few loan options, typically called hard money loans, available for people with poor credit; however, they do tend to charge a higher interest rate. You also could consider 401(k)/IRA Rollover Funding (ROBS) programs, and other options that allow you to utilize assets you may have to purchase a franchise. If these aren’t options for you either, you might want to consider loaning money from friends and family, taking on a partner, or trying again in a few years after you have paid off any debts and taken necessary measures to improve your credit score.
Q: If I was already declined for a loan, does that mean I can’t get funding?
A: Not necessarily. It could have just meant the bank(s) you applied to weren’t interested in the concept or territory you were pursuing. That’s why it’s important to work with a funding partner who works with a variety of different lenders and who knows which ones might be interested in you and the franchise concept you are seeking. This typically helps secure multiple offers, thereby allowing you to choose the one with the best rates and terms.
Q: What retirement plans qualify for 401(k)/IRA Rollover/ROBS programs? Do I have to use all of my retirement funds?
Retirement plans that qualify for this type of small business financing include: 401(k) Plans, IRAs, 403(b) Plans, SEPs, 407 Plans, Cash Balance Plans, Employee Stock Ownership, Money Purchase Plans, Annuity Plans, Defined Benefit Plans, Rollover Plans, and SIMPLE Plans. (Roth IRAs are ineligible). There is no need to use all of your retirement funds for this method of funding – you can use a portion of the amount rolled over into the new retirement plan created.
Learn More about Franchising
“Owning a franchise allows you to go into business for yourself, but not by yourself.”
A franchise provides franchisees with a certain level of independence where they can operate their business.
The International Franchise Association is committed to educating prospective franchisees on the dynamics of franchising and providing them with information to begin their evaluation of whether to become a franchisee. Beginning with the adoption in 1970 of the first franchise disclosure requirement in California.