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. One of the most important aspects of opening a franchise is funding. Funding options come in all shapes and sizes. Based on your timeline, risk tolerance, credit history, and more, the best option for you might be a single solution, or a combination of several options.
Franchise Funding 101
Brought to you by Benetrends Financial – A Strategic Funding Partner of the IFA
One of the most important aspects of opening a franchise is funding. But just as franchises come in all shapes and sizes, so do the options for funding them. Based on your timeline, risk tolerance, credit history, and more, the best option for you might be a single solution, or a combination of several options.
Intro to Funding
- Using your Retirement Funds to Buy a Franchise (also called Rollover as Business Startups, ROBS, or 401(k)/IRA Rollover Funding): This method allows you to use your 401(k), IRA, 403(b), or other qualified retirement account to buy a franchise – with no penalties, upfront taxes, or debt. It can also be used as the capital injection required for SBA loans.
- SBA Loans (Small Business Administration): There are a variety of loan programs available through the SBA including specific ones for veterans, disaster recovery, etc. The primary one for small business owners is the 7(a) program, which is more generally focused on helping small businesses start and grow.
- Conventional Loans: Conventional loans can be provided by bank and non-bank lenders, but are not guaranteed by the SBA or other government entity. Any small business or franchise can apply; however, they are not typically available for new businesses. Approval depends largely on the overall credit risk of the business.
- Securities Backed Line of Credit: A line of credit backed by securities held in an investment portfolio. This type of loan is similar in concept to a home equity loan, but rather than the loan being backed by the equity in your home, it is backed by the securities held in your investment portfolio.
- Home Equity Loans: Although becoming less common, some entrepreneurs still rely on their biggest asset for cash – the equity in their homes – to finance a franchise or business purchase.
- Equipment Leasing: Finance up to 100% of the value of equipment you need to start or run a business including: computers, office furniture, company vehicles, machines or special service equipment. This option may include a buyout for $1 at the end of the lease.
- FIRST-TIME FRANCHISE OWNER: Taking into account the franchise fee, royalty fees, working capital and other possible costs needed to start a franchise business, most potential franchisees find they don’t have the cash resources to purchase a franchise upfront. If you find yourself in this position as well, don’t be surprised if you run into a few financing challenges. Many lenders are typically more hesitant to approve loans if you don’t have experience or a solid track record as a business owner. Having said that, it’s not impossible, and luck favors those who are prepared.
- MULTI-UNIT OPERATORS: The most important thing to know if you want to become a multi-unit operator is that how your first unit is funded affects your ability to fund future units. So, if you are arranging financing for the first unit without considering how it is going to affect your ability to get additional financing, you may find yourself without any options to fund additional units. Since many larger franchises require a 3-unit commitment, the most common scenario is a “three-pack” over a 2-3 year window.
Funding Options Tool
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