When it comes to pursuing your dream to own a franchise, access to capital can often present the biggest hurdle. In fact, concerns over how to finance a franchise—and the “not knowing”—can sometimes stop hopeful entrepreneurs in their tracks. Don’t let fear of the unknown deter your dreams! Fortunately, there are several franchise financing options available that won’t break the bank. Choosing the franchise financing option that’s best for your financial and professional goals is just as unique as selecting the right franchise brand for you. Read on to learn more and explore your options!
Diverse Franchise Financing Sources
SBA Loans: Among the most popular financing options, U.S. Small Business Association (SBA) loans are guaranteed by the Small Business Administration (SBA) and provided by banks. These loans can go up to $5 million. There has been a lot of talk lately about the SBA doing away with the Franchise Directory and what this could mean for franchise financing. Read this article to learn more.
Low-doc SBA Loans: If you require a smaller amount, typically $150,000 or less, low-doc SBA loans are an excellent alternative. They offer the same benefits as regular SBA loans but with a faster approval process.
Rollovers for Business Start-Ups (ROBS): An often overlooked method is utilizing your retirement funds for franchise investment through a program called ROBS. With ROBS, you can invest up to 100% of your retirement funds into a franchise without incurring taxes, penalties, or loans. Eligibility for ROBS requires a minimum of $50,000 in qualifying retirement accounts, such as IRAs, 401(k)s, or 403(b)s. Combining your retirement funds with a partner’s or traditional business loans is also possible.
Portfolio Loans: Another option is a security-backed loan that will allow you to leverage a financial portfolio, such as a mutual fund, as collateral. This approach offers multiple advantages. Firstly, your portfolio can continue to grow while you utilize the loan. Secondly, since the loan is secured by your portfolio’s value, the interest rate is typically lower compared to unsecured loans. However, bear in mind that borrowing against your securities carries the risk of amplifying potential losses if your investments decline in value.
Unsecured Loans: These loans do not require collateral, making them an attractive option for those seeking a fast funding solution. Approval can be obtained within three weeks.
Determining Your Franchise Financing Needs
To calculate the capital required for launching your franchise, franchise companies provide estimates of fees and startup costs in their Franchise Disclosure Document (FDD), specifically Items 5-7. Additionally, they often offer data on average monthly sales and year-over-year revenue growth. Remember that FDD information typically represents the average financial data across the entire franchise system or specific markets, so it may not fully apply to your unique market with its distinct costs for real estate, labor, and other factors. Therefore, it’s crucial to identify these market variables to obtain a more accurate estimate of your total capital needs.
Once you have a clear understanding of your new business’s capital requirements, you can evaluate how much you can cover from personal savings and how much you need to borrow from other sources such as home equity loans, retirement savings, or traditional bank loans. Additionally, it’s wise to have a reserve of debt-free funds to sustain yourself if the business doesn’t take off as quickly as anticipated. Ideally, having at least one year’s worth of living expenses as a backup is advisable. Furthermore, inquire about any available discounts, as many franchises offer them to female majority owners, ethnic minorities, or military veterans.
Similar to any business loan, potential funders will evaluate your credit rating, liquid assets, collateral, and experience. The key difference is that lenders recognize franchises as established brand-name businesses backed by proven success models.
Franchise Financing Within Your Budget
The thought of navigating through complex financial requirements and presenting a compelling business plan can feel overwhelming. Moreover, the fear of rejection and the uncertainty of obtaining the necessary funds can add to the stress. The good news is financial institutions and organizations specializing in small business loans understand the potential of franchises and often have tailored loan programs for franchisees. These programs offer support, guidance, and flexible terms that make the loan application process more approachable. Additionally, franchise systems themselves often have established relationships with lenders, which can further simplify the process and provide franchisees with confidence in their loan applications. While the process may still seem daunting, it’s reassuring to know that there are resources and options available to help aspiring franchise owners achieve their dreams.
Plus, there are myriad franchise opportunities to suit every interest and budget. This becomes evident when you explore our list of top franchises—based on the feedback, ratings, and experiences of actual franchise owners—the true experts!
Remember, financing a franchise requires careful planning and consideration. By exploring various funding sources and assessing your budgetary requirements, you can make informed decisions to turn your franchise dreams into a reality.
FBR partners with a team of experts who can pre-qualify you for an unsecured loan in minutes.