When exploring franchise opportunities, securing the right franchise funding is a critical step in your entrepreneurial journey. This article delves into various financing options available to potential franchisees, providing you with the knowledge needed to make informed decisions. From franchisor-assisted financial programs, including waived fees and deferred payments, to Small Business Administration (SBA) loans and innovative funding methods like Rollovers for Business Start-Ups (ROBS), you’ll discover a range of possibilities to suit your financial situation. Additionally, we’ll cover the benefits and considerations of franchise funding sources, such as unsecured loans, portfolio loans, and angel investors, ensuring you comprehensively understand how to finance your franchise venture.
Franchise Financing Options Through the Franchisor
Waived Fees or Deferred Payments
Some franchisors offer financial assistance to new franchisees. For instance, certain brands may offer to waive or discount the franchise fees, offer a loan based on simple interest with no principal, or offer deferred payments for a period of time. Others will help you connect with outside lenders to get funding. This information can be found in Section 10 of the FDD. It’s also important to note that if you are an independent business owner looking to move into franchising, you may have opportunities to merge your business with an existing franchise system. Lisa Coleman, a franchisee with Westaff, did just that. ”As the owner of an independent staffing company, I had a non-traditional entry into the franchise. I successfully merged my clients into Westaff and received incentives for doing so,” she explained.
Franchise Financing Through the Small Business Association
SBA Loans
One of the most common forms of financing, these loans—up to $5 million—are guaranteed by the Small Business Administration (SBA) and lent by banks.
Low-doc SBA Loans
An alternative for those searching for lower amounts of capital, $150,000 or less, these loans offer you the same benefits as SBA Loans with a shorter turn-time.
Franchise Financing Through Retirement Accounts
Rollovers for Business Start-Ups (ROBS)
Many people don’t realize that you can invest up to 100% of your retirement funds into a franchise without taxes, penalties or a loan via a program called Rollovers as Business Start Up (ROBS). To qualify for ROBS you must have at least $50k in eligible retirement accounts such as an IRA, 401(k), or 403(b). Your retirement funds can be combined with a spouse’s, partner’s or traditional business loans.
Franchise Financing Through Mutual Funds and Securities
Portfolio Loans
Another option is a security-backed loan, which enables you to take a loan using a financial portfolio, such as a mutual fund, as collateral. There are several potential advantages to doing so. First, you can leave your portfolio in place, which enables it to grow. Second, because your portfolio’s value backs the loan, the interest charged will be lower than for an unsecured loan. It is important to note that the risk of borrowing against the value of your securities is that if your investments fall in value, the money borrowed will emphasize your losses.
Financing with Banks, Credit Unions and Lenders
Unsecured Loans
You don’t need collateral to qualify for these loans, which can happen in just three weeks. They are a great option if you need a fast funding solution. Banks and credit unions are good sources for unsecured loans if you have a high credit score. Consider a third-party lender if your credit score is lower than the required range for banks and credit unions.
Angel Investors
Funding in Exchange for Stake in Business
Angel investors are individuals or groups investing in businesses in exchange for a direct role. When you take funds from an angel investor, you should expect to lose some control over your business as the angel investor will now be a partner who will have a say in all decision-making. Depending on how you look at it, however, this can be a good thing since angel investors often offer experience and expertise that can help your business grow.
How to Apply for Franchise Financing
No matter where you go for franchise financing, you’ll likely need to produce certain documents to prove your trustworthiness as a borrower. These documents include:
- Credit history tells lenders how reliable you will be based on your borrowing history.
- Personal financial statements—Lenders want to know that you are in good financial health before they hand over a lump sum of money. They will want to see your current bills, debts, and loans, as well as your savings, income, and assets.
- A business plan – Lenders will want to see your business plan to understand how you will use the money they are lending you — and determine if your business is a strong investment. Lenders will be more likely to grant you funding if you buy a franchise with a well-known brand name and a proven track record of success.
Just like buying a home, buying a business is a major investment. When analyzing your franchise investment options, you should consult a franchise attorney and a financial advisor specializing in franchise funding.
Finding a Franchise That Fits Your Budget
The good news is that there is a franchise for every budget, as you’ll see while looking at the list of top franchises according to those who know best – the franchisees who own them.
Franchise Business Review is committed to helping potential franchisees find the best franchise opportunities available today. Contact us for more information, or check out our most recent list of this year’s top-rated franchise brands.
