How Do I Fund a Franchise Investment?
When it comes to figuring out how to fund a franchise, you should take the “the sooner the better” approach. You’re likely excited to open your business if you’re retiring soon or if you’ve always wanted to work for yourself. Once you know you want to open a franchise, it’s time to start thinking about franchise investment. Some funding options won’t affect your business immediately, but you don’t want to miss out on the chance to benefit from a long-term franchise investment. Planning for your business’ financial future can be the first step to ensuring your company is a thriving community staple for years to come.
You have several options and funding methods when it comes to your franchise, so working a franchise consulting firm can be helpful when you want to know how to organize your finances both immediately and in the long run. Consider your credit history, as well as your business timeline and risk tolerance to determine the methods that will work best for you. You may find a single solution is ideal for funding a franchise or you can utilize several options to make sure your cash flow is steady and operational costs are taken care of.
Learning the Fundamentals
When you’re looking for funding for your franchise, one of your first plans of action should be to speak with the franchisor. Most corporations that operate under a franchise business model will provide you with customized financing methods designed for franchise owners. You can receive funding either by utilizing capital directly from the corporation or working with specified lenders for startup funding. You’ll also receive several benefits when you use franchisor funding. Businesses like Meineke, Gold’s Gym and the UPS Store are well-known corporations that use this funding model.
Another benefit of using franchisor funding is that it’s a one-stop shop for all your business needs. A number of these programs will cover your franchise fees and give you the funding you need to buy resources and specialty equipment that you need to start your business and keep customers coming back.
When you’re considering methods to fund a franchise, you may also be able to use your retirement funds to purchase the business. This is also known for 401K/ IRA Rollover Funding or ROBS, which stands for Rollover as Business Startups. When you use these funding methods, you can use your IRA, 401K, 403b or another retirement account to purchase a franchise. You don’t have to pay any upfront taxes or debt and there are no penalties for utilizing the money. You can also use the money from these accounts as capital injection for SBA loans.
SBA loans come from the Small Business Administration. There are several loan programs you can take advantage of through this organization. The SBA also offers loans for disaster recovery and veterans, but the main loan for business owners is the 7(a) program, which is usually for individuals who want to grow their small businesses.
You can also opt for a conventional loan. These loans are issued by both banks and lenders that are not associated with a bank. The loans are not guaranteed by a government organization of the SBA. Any franchise or small business can apply for a conventional loan. Your approval will depend mainly on the credit risk posed by the business.
You may want to apply for a securities backed line of credit to fund your franchise. This line of credit is held in your investment portfolio and is similar to a home equity loan. Instead of the loan being back by your home’s value, securities in your portfolio back this line of credit. Of course, your home equity loan can also be used as startup funds for your franchise. This is not as common as other funding options but could be your most reliable cash asset to start your new business.
Keep in mind that equipment leasing can provide franchise funding as well. You can finance up to 100% of the value of the equipment you’ll need for your business. This can include machines, service equipment to make specialized products and commercial vehicles. If you decide on this option, you may be eligible for a $1 buyout when your lease is up.
If you’re a first-time franchise owner, you’ll need to consider the franchise and royalty fees that come with opening your business. Additional costs like working capital should also be in place when you’re ready to become a business owner. Too often, franchisees discover that they don’t have enough cash resources to buy the business upfront. Some lenders are also reluctant to approve business loans if you don’t have a positive track record as a franchisee.
If you want to be a multi-unit operator, keep in mind that the way your first unit is funded will affect your ability to pay for additional units in the future. While you’re planning to fund the first unit, have a plan in place for how you’ll fund more units. Most of the time, larger franchises require a commitment of three units, so you should prepare to pay for these three units during a 2 or 3-year time period.
Further Exploration of Funding Options
Being a business owner can provide independence and flexibility. When you’re a franchise owner, you also have the support of a larger corporation, so this may be the best choice for becoming a first-time business owner.
Still, remember that opening a franchise does require you to come up with significant capital. You’ll usually have to pay a franchise free, as well as advertising costs and royalties that are ongoing. All potential franchisees won’t have access to this type of money. So, if you need a business loan to fund your new business, it’s best to consider one or more of the options above.
Working with an advisor can simplify the process for you and help you enter into your franchise contract with ease. When you’re comfortable with your funding options, you’ll be able to concentrate on being an effective and successful business owner.