Franchising is a great way of investing your hard-earned cash with minimal risks, and the best part is that you have over 1,000 options to choose from. Also, franchising is a popular way of expanding a business without many financial obligations.
Buying a franchise is arguably the most expensive investment you will have to undertake in your life and hence, you’ll require to be well funded. But how will you finance the franchise purchase? The approach you take can significantly impact the failure or success of an investment and that’s why most buyers contact a franchise lawyer before for the best results.
Funding Options for Franchise Startups
There are many affordable and available funding options for franchise startups. In this article, they are listed/ discussed from the most conservative to the riskiest.
- SBA Loan
Small Business Administration loan is a popular, tried-and-true way of sourcing business finances/ capital for franchise startups. Why? The SBA collaborates with different banks to help small businesses find the best loan deals. SBA loans are partially guaranteed by the government and that’s why financial institutions are always open to the idea of SBA loans. In other words, your financier has somewhere to turn to if you default.
- Partners or Investors
Franchising doesn’t have to be a one-man show. Having that in mind, you should always consider the help of others, particularly if they have relevant expertise in that field. Collaborating with others means that you’ll not be bearing financial risk alone.
Besides partners, you can find investors who typically like reaping rewards in proven franchise business concepts while staying behind the scenes. Also, partners and investors allow you to invest less money and decrease the risk.
- Equipment Loan
An equipment loan could be all you need if your franchise concept requires heavy machinery. The good part is that there are lenders who specialize in that. Equipment loans are typically secured by physical assets–meaning they can be easy to obtain. On the downside, the equipment may be repossessed if you fail to make payments — and that means that you’ll be out of business.
- Franchisor Financing
You can also partner with a lender who specializes in funding franchise businesses to get started. When you form close ties with such a lender, you will undoubtedly enjoy favorable rates and your loan approval will be fast-tracked.
- Bank Loan
When all other financing options fail, you should approach your banker and get a loan. However, you must have a good credit rating–that’s why many investors turn to crowd-funding, thanks to poor credit ratings. The downside of a bank loan is that your credit rating and future borrowing will be affected if you fail to repay the loan as agreed.
- 401(k) Rollover
This is also another good way of buying a franchise although it risks your retirement package. The Rollovers as Business Startups (ROBS) allows a new franchise to create a 401(k) plan for its employees then the franchisor transfers their funds into their new business’s 401(k). At this point, the funds are used to fund the launch. If you have a significant amount in your 401(k) account, a specialized lender can help your franchise set up new retirement plans and roll over their savings.
- Tap the HELOC
Did you know you borrow against the equity to buy your franchise if you’re a homeowner? This is done by taking a Home Equity Line of Credit (HELOC). Although the HELOC funding option has friendly rates and repayment schedules there’s a risk involved– failure to repay the loan could be the genesis of losing your home.
Why Not Pay Cash?
Looking at the downsides of the above-discussed funding options, you may wonder why most investors don’t buy a franchise on a cash basis. Research shows that only a few entrepreneurs/investors buy a franchise on a cash basis, even if they can afford them. The reason boils down to risk. Look at it this way, all your cash will be tied up in the franchise and remember that most franchises do not earn anything as this is the time when the business is at the growth stage (2 to 3 years).
On the other hand, borrowing money or using investors/partners allows a buyer to diversify and invest some of their cash in other ventures. The best part of borrowing is that it puts less of an investor’s total net worth at stake, a smart move that gives them more options. There are many financing options available to you if you want to buy a franchise. Weigh all options carefully, before settling on an ideal choice that fits your situation.
Identifying a financing option for a franchise can be tricky and it may even impact the future performance of your business. That said, always involve experts, such as accountants and legal professionals in this process for the right outcome.
