By Colin Hamilton, Unsecured Funding Source

Although franchise costs can range from $10,000 to $5,000,000, the majority of franchises cost between $50,000 and $200,000. Ironically, the range where the majority of franchises fall, is also the most difficult to find funding for. While franchise startups below $75,000 can often self-fund out of cash, and for enterprises costing $250,000- and-up, entrepreneurs tend to be able to acquire traditional SBA and commercial loans. The gap in-between those two is traditionally a difficult amount to achieve. It is that perfect number where it is often too much for someone to pay cash out of their savings accounts for, but lower than many SBA lenders want to deal with, due to the time and energy it takes to underwrite SBA files. Many new franchisees are faced with the difficult process of trying to figure out the best way to fund their franchise, and many are not presented with the wide range of options available to get their new venture off the ground. Although SBA loans are a great product that have funded millions of America’s businesses, a one-size fits all funding strategy is no longer viable in today’s constantly changing economic conditions. Attempting to open a new franchise, or expanding operations on an existing franchise, within the range of $50,000-$250,000, can prove a difficult task. As such, we see many franchisees utilizing the following six funding vehicles as viable options for their venture. These following six are not mutually exclusive and many entrepreneurs are choosing to utilize a combination of one, two, or even more options in order to fund their franchise start-up.

1. Equity Investors: One common form for financing is selling partial ownership of the company to investors or business partners. The franchisee can lean on investors to leverage their networks to make a franchise more profitable while sharing risk; however, this can also create other issues. One needs to get along well with their partners and will normally take home less profit both from operating the business as well as in the eventual sale of the business.

2. Cash: A very popular option recently, cash creates the opportunity for cash flow sooner from the business as interest rates rise. However, choosing to utilize cash as a primary means of funding comes with costs as well. Exhausting cash supplies leads to lack of diversity in their portfolio. Many savvy investors prefer to keep in other investments, diversifying their portfolio. As well, utilizing all your cash creates further risk if you need additional funding due to unforeseen circumstances.

3. ROBS: A popular funding option for the past 40 years, ROBS (Rollovers as Business Start-ups) is investing your retirement in oneself. Utilizing funds from an existing 401(K), one can redirect the capital into their own business. When one goes to sell their business, the profit goes back into their retirement, tax free. Although it is a great funding option for some, it is limited. If a franchisee is looking at a side-hustle or semi-absentee model while continuing at their current place of employment where the 401(K) is held, they cannot normally utilize funds from the 401(K).

4. Commercial Loans: Although traditionally commercial loans have been difficult for new franchisees to acquire due to lack of time in business, there are now options available out there for new franchisees. UFS has launched the Jumpstart Loan program, with zero requirements for time in business, to assist new franchisees with starting and launching their first units. This is a revolutionary new product which allows for quicker funding and ramp ups, with far fewer requirements than the SBA loan programs. Many borrowers looking to fund in the $50,000- $250,000 range have begun to pursue the Jumpstart Loan.

5. Personal Loans: Overlooked by many seeking funding options, personal loans are becoming more popular in funding franchisees up to $350,000. Utilizing one’s own personal credit profile, personal loans can be leveraged to fund non-SBA-eligible franchises, like cannabis, CBD or emerging brands. However, personal loans are also being utilized for traditional franchises as well, due to lower time, and stress, investment than a traditional SBA loan. Personal loans can take 2-3 weeks, require minimal paperwork, and not involve the cost of business plans and packaging.

6. HELOCs: Currently, many franchisees utilize HELOCs as an option to pull equity from their homes at some of the lowest interest rates possible. The lower minimum monthly payments help a new franchisee cashflow their budding business. The downside, however, is the collateralization of their home, putting additional stress on the franchisee. One great way to use the HELOC is to leave some available balance, in order to address any financial strains that may arise in the first couple years.

Regardless of which of these options the franchisee chooses to utilize, it is imperative to think through the pros and cons of each vehicle. There is no one simple answer when it comes to investing in one’s franchise, and one should always compare, research and seek counsel from trusted advisors and investors on how to proceed. Taking into account one’s risk tolerance, (such as willingness to collateralize one’s house), one’s goals (long term net worth vs current cash flow), and current personal financial conditions are paramount to creating a funding strategy for achieving success as a franchisee.

Colin Hamilton is the director of business development at Unsecured Funding Source, a direct lending and advisory service for start-ups and business acquisitions. For more information about IFA supplier member Unsecured Funding Source, please visit franchise.org/suppliers/unsecured-funding-source.

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