How to Finance Your Franchise
When considering finance options for a franchise opportunity, the best strategy is to take a personal inventory of your resources first, before deciding on one path or another. There are many creative options and strategies to utilize.
The International Franchise Association has made capital access a key strategic initiative in its mission to promote franchising, and below are the various steps you should take to see where you stand relative to entering the exciting world of franchising.
First, prepare a personal financial statement for yourself and any others joining you in your venture. The SBA version is available at http://www.sba. gov/sbaforms/sba413.pdf.
Once you have completed the statement, take a look on the asset side at the funds that you have available. Decide on your personal level of risk, and how much of your resources you are willing to invest in your franchise. next, create a strategic plan for your business.
Avenues for financing a franchise include:
- Conventional Loans
- Self Directed Retirement Plans
- Direct Franchisor Financing
- SBA Loans
- Online Loan Portals
Looking to get funding for your business, but not sure which is the right solution for you? Use our Funding Options Module
Of course, using your own cash to buy the franchise will create a debt-free business. However, if you are looking at being a multi-unit operator, that may not be the best strategy, as you will need your cash for growth. Your plan, along with Item 5 in the Franchise Disclosure Document from the franchisor should give you some direction.
Conventional loans are usually limited to existing business owners seeking unit expansion, or new owners with very specific direct experience. In addition, lenders are looking for collateral in real estate that can be attached to mitigate their risk. Terms generally run five-10 years.
Self directed retirement Plans
You may be able to use your 401k or IRA as your partner in your franchise. There are some specific requirements, and the process takes only a couple of weeks to complete. There is a very strict process that needs to be followed, and you should engage an expert in the field to help you get started. Check the IFA website, www.franchise.org, for an IFA Supplier Forum member that specializes in this process.
If your franchise has hard assets or equipment such as a vehicle, office machinery and so forth, leasing may be your best option. Rates and terms vary widely, so you need to conduct research on your equipment package, and the best way to finance it.
Direct Franchisor Financing
Most franchisors do not offer financing. Item 10 of the Franchise Disclosure Document will let you know if any is offered. If financing is available, it may not be at the best terms that you may qualify for on your own, so make sure that you do due diligence for yourself.
SBA Loans (www.sba.gov)
Small Business Administration loans are one of the most common forms of financing for a franchise. These loans are designed to mitigate lenders risk by offering a guarantee on the principal of the loan from our federal government. If real estate is involved, the government actually funds a portion of the loan directly. SBA loans are very cumbersome to apply for, and require personal guarantees and mortgages to be placed on your properties, so make sure that you get professional help when applying for an SBA loan. You can now borrow up to $5 million through SBA. Your franchisor may recommend someone, or you can engage your CPA’s assistance. IFA has vendors that specialize in placing SBA loans, go to www.franchise.org and click on the “Find Supplier Members” under the “About IFA” tag. Search for financial services to find a specialist.
Online Loan Portals
Online loan portals are a new entry to the franchise space. Ask your franchisor if they subscribe to any of these websites or look at the IFA Supplier pages for direction to these sites. Their goal is to match potential borrowers with lenders. Each has their own level of service, and fees may apply. However, this allows your application to be reviewed by multiple lenders who subscribe to the system, and may increase your ability to get a loan.
All of the Above
It may be best for you to utilize a combination of the above mentioned vehicles for the funding of your franchise. Don’t rely on only one method, explore all that apply to your concept, your financial situation and your risk tolerance. Use the resources that IFA has available on their website, and enlist the expertise of IFA’s suppliers to help you get through this process. Financing is much more of a challenge today than it was in the past. Don’t give up after only one or two tries. Persistence will pay off.