Are you prepared to ditch the traditional 9-to-5 and become your own boss utilizing a tried-and-true business design? Could it be your use become certainly one of over 700,000 franchise owners? You’ve done your quest, and you’re ready to make the act as an entrepreneur. So, what’s stopping you against buying your personal franchise? If you’re like a number of other aspiring entrepreneurs, one big challenge is holding you back. It’s the dreaded F-word: funding.
While purchasing a franchise is usually less than starting a new business from scratch, you may still find one-time and ongoing costs that accrue before you even open your doors to customers. Franchise fees, insurance costs, inventory, equipment, business licenses, and royalty payments are just a handful of the costs associated with franchising. With initial franchise fees alone costing tens of thousands of dollars, an average joe isn’t able to simply create a check or withdraw funds using their own banking account.
The great news, though, is the fact that you will find financing options out there that help with the financial burden of business ownership. As well as better, many of these options have low interest and favorable repayment terms, so investing in a franchise is more affordable. You may even have the ability to make use of funds that you already have access to.
In this article, we’re going to explore seven methods to purchase a franchise whenever you don’t — or think you don’t — have the funds to do this. From government-backed loans to penalty-free withdrawals out of your retirement account, we’re likely to take an in-depth consider the funding options that can enable you to get on track to buying your own franchise.
Franchisor Financing
One of the most appealing advantages of purchasing a franchise is that sometimes you don’t need to look very far to obtain financing. In fact, many franchisors across various industries offer financing options for new and existing franchisees. Franchisor financing is a win-win for everyone: the franchisee gets needed capital while the franchise keeps growing with the addition of new locations.
The amount of money and kind of financing offered vary by franchise. For example, Weed Man provides up to $40,000 to franchisees that may not qualify for a financial loan. The UPS Store also offers a low-interest financing program to qualified borrowers. Marco’s Pizza offers personal guarantees and assists franchisees to find funding through sources including traditional and SBA loans.
Like other kinds of financing, you've got to be qualified to apply for financial help using your chosen franchisor. Borrower requirements vary by franchise, but you should be expecting to have some funds to place in to the business and meet any credit requirements.
SBA Loans
If you want long repayment terms and low interest rates, a conventional loan will do the job. Unfortunately, qualifying for this type of loan is difficult for any business proprietor — especially one that’s a new comer to the sport. What's promising, though, would be that the Sba (SBA) makes it much simpler for people like you to get loans with competitive rates and terms.
The SBA itself doesn't distribute loans. Instead, this government organization supplies a guarantee on loans supplied by banks, bank, and other lenders, known as intermediaries. Just because a large percentage of each loan is backed through the SBA, it’s easier for franchisees along with other small business owners to become approved.
There are several types of SBA loans for franchisees, only one of the greatest is the SBA 7(a) loan. With this loan, you may receive as much as $5 million with repayment terms starting at Many years and going as much as Twenty five years. Funds can be used as a number of purposes including commercial real estate, equipment, franchise fees, along with other startup costs. Rates of interest are extremely competitive and therefore are based on the prime rate plus up to 4.75%. Minute rates are based on the amount and amount of the loan. Learn more about SBA 7(a) loans.
Another SBA loan choice is the CDC/504 loan. With this particular option, a nonprofit Certified Development Company (CDC) provides as much as 40% of the amount needed by the franchisee. A conventional lender, just like your bank , provides as much as 50% from the amount. With this option, you could contribute as little as 10% to get the funding you need.
There are more limitations how CDC/504 funds can be used. When you can’t use funds to pay franchising fees, you can use this loan to purchase, expand, or update commercial real estate for the franchise. You can also use funds to buy equipment for your business. CDCs can loan a maximum of $5.5 million with terms up to 25 years. Like SBA 7(a) loans, CDC/504 loans have very competitive interest rates in line with the prime rate along with a markup. Learn more about CDC/504 loans.
Although qualifying to have an SBA loan is easier than getting a conventional loan, the procedure could be time-consuming, taking anywhere from weeks to months for approval and funding from the loan. You have to also meet all of the requirements for 7(a) loans and CDC/504 loans, including although not limited to having a solid personal credit rating, putting up collateral, and meeting the rules of a small company as based on the SBA. It's also wise to be ready to pay any fees needed by the lender, including appraisal fees, service fees, and shutting fees.
Home Equity Loans & HELOCs
If you have your own house, you could utilize your equity as collateral for a startup loan for the franchise. Equity may be the difference between what is owed around the property and also the value of the property. For example, in case your home is appraised at $500,000 and you owe $300,000 in your mortgage, you've $200,000 worth of equity within the property that you could potentially leverage for the business enterprise. Equity is built up in case your home value increases as well as when you reduce your mortgage.
With a house equity loan, you won’t be able to borrow the entire quantity of equity, though. Most lenders will only provide you with 80% of the value of your home, less what's still owed. Funds can be used for any purpose, including covering startup costs and franchising fees for the start up business.
You may also think about a home equity credit line, or HELOC. Rather than a lump sum payment, you have access to an adaptable credit line that is backed by the equity in your house. You’ll be able to withdraw funds when needed as much as your set credit limit for any certain time period. This is known as the draw period and usually lasts twelve months. Following the draw period ends, you enter the repayment period. Since HELOCs are a form of revolving credit, you are able to reenter the draw period once you’ve repaid borrowed funds.
Competitive rates of interest, long repayment terms, and flexible utilization of funds make hel-home equity loans and HELOCs a good choice for since the expenses associated with buying and operating a franchise. On the other hand, though, your individual rentals are at risk should you default on your loan.
In addition to having equity in your house, you must also satisfy the other requirements of your lender. This includes using a high personal credit rating, a low debt-to-income ratio, along with a solid repayment history.
Rollovers As Business Startups (ROBS)
Another way to get the cash you need to purchase a franchise is to apply funds you have in your retirement account. Normally, drawing from your account early leads to penalties. However, you can avoid these penalties and access your funds in only weeks with a Rollovers for Business Startups plan, also known as ROBS.
Instead of borrowing from a lender, a ROBS plan enables you to make use of your own retirement funds to begin your personal business. A new C-corp is established, and a new retirement fund is created. Funds from the existing retirement account are rolled over in to the new retirement account. These funds are used to purchase stock within the C-corp, providing you with accessibility cash you have to build your business.
Qualifying for a ROBS plan is easy — you simply need a qualifying retirement account, like a 401(k), 403(b), or IRA. You don’t have to worry about using a high credit score, some income, or other requirements required for other types of funding. As this isn’t a loan, you also don’t have to worry about paying interest to some lender. The down-side, though, is that if your business fails, you risk losing your retirement funds.
While you won’t need to pay interest to a lender or penalties for the early withdrawal of funds, you will need to work with a ROBS provider. For any one-time setup fee, a ROBS provider will help you setup your C-corp and retirement account. You may also need to pay a monthly fee to cover maintenance and reporting on your account.
Ready to leverage your retirement funds to purchase a franchise? Learn more about how ROBS will help you launch your brand-new business.
Online Loans
The internet makes it easier than ever to shop for loans to buy a franchise. Unfortunately, as a startup, you will probably find it hard to find a competitive business loan. Lenders evaluate risk by taking a look at factors just like your business and personal credit profiles, annual revenues, and time in business. Should you haven’t yet launched your company or you’re within the very initial phases, finding funds with favorable rates and terms could be a challenge.
One option you have, though, would be to remove an unsecured loan for business. Whenever you apply, you utilize your individual information — personal credit score and background and annual income, for example — to be eligible for a funding. That loan can then be employed to get your franchise or fund other startup costs.
Partnerships
If you don’t have the money to purchase a franchise, consider bringing on somebody that does and forming a partnership. A buddy, member of the family, colleague, or anyone with money to take a position may become someone. Bear in mind, however, that forming a partnership means that you will be handing over partial ownership of the business. This means that you won’t be the sole one making the choices … or taking the profits.
When you get a business partner, make sure that you work with an attorney to draft all documents and agreements. Having the right documentation doesn’t just protect each partner; additionally, it means remain compliant with Securities and Exchange Commission regulations.
Low-Cost Franchises
If you have some cash in savings or any other supply of funding, shop around for lower-cost franchising opportunities. The large players — think, McDonald’s, Chic-Fil-A, and other established franchises — are usually the costliest to purchase and operate. Instead, focus your sights on more affordable opportunities that will permit you to definitely break into business ownership.
In accessory for finding low-cost startups, you may also look for franchises that offer discounts to new owners. For example, some franchisors offer discounts on franchising fees to women, minorities, or military service members and veterans. You are able to start your quest by checking out our picks for low-cost franchises.
Final Thoughts
Even though purchasing a franchise is one of the simplest ways to dive into business ownership, choosing the best supply of funding to get your business off the floor could be a challenge. However, as you can see from the methods above, affordable funding is offered. The important thing is to research all your options, get creative together with your funding if you have to, and choose the choice that’s perfect for your business in the long run.
Interested in learning much more about owning a franchise? Browse the Step-By-Step Help guide to Purchasing a Franchise to learn more to obtain started.
