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Finding Funding For Your Franchise
The largest barrier when it comes to opening a franchise is typically access to capital. Fortunately there are a variety of ways you can fund your franchise investment.
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.
Rollovers for Business Start-Ups: 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.
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 the loan is backed by your portfolio’s value, 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.
Unsecured Loans: You won’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.
For more information about the above funding options, visit the Franchise Financing section of FranchiseBusinessReview.com. For a detailed walkthrough on funding your franchise, visit FBR Franchise Buyer’s Toolkit.
How Much Money Will You Need?
When it comes to figuring out how much money you will need to launch your new business, franchise companies provide estimates of fees and startup costs in Items 5 – 7 of their Franchise Disclosure Document (FDD) and will often give you data regarding average monthly sales and year-over-year revenue growth. It is important to keep in mind that FDD information is typically average financial data across the entire franchise system, or sometimes only select markets, so some of it may not be applicable to your particular market, which has its own costs for real estate, labor and other factors. We advise you to identify these market variables in order to better estimate the total capital you will need.
Once you have a good understanding of the total capital needs of your new business, you can determine how much of the investment you can cover with personal savings, and how much you will need to borrow through other sources (ie. home equity loans, retirement savings, traditional bank loans, etc.). In addition, you should plan to have a cushion of debt-free funds to live on should your business not take off as quickly as you expect. Ideally, it’s a good idea to have at least a year’s worth of living expenses as a backup reserve. Also, be sure to ask about any available discounts. Many franchises offer them for female majority owners, ethnic minorities or military veterans.
Just like with any business loan, potential funders will look at your credit rating, liquid assets, collateral and experience. The important difference is that lenders understand they are providing funding for a franchise— a brand name business that is backed by a proven model for success.
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