By investing in a franchise, you are skipping the grueling labor of establishing a brand and building a steady source of customers. If you are choosing a more well-known franchise, then your business will be instantly recognized in your community. Now, it's up to you to deliver the high-quality services or products that your franchise prides itself on.
While this all sounds great, none of it is possible if you don't have the money to invest. Maybe you want all of the benefits of business franchising but don't have the funds prepared. If you need to know how to find franchise funding, then here are a few potential sources of money.
1. Franchisor Financing
Certain franchisors offer in-house financing options. This is something to inquire about during initial franchisor interviews. Other franchisors partner with external lenders to get their franchisees on the road to success. If you work with one of these lenders, you are more likely to be approved in a timely manner and with lower interest rates.
2. Investors or Partners
You don't have to go it alone. Many franchisees invest in business franchising with a partner. This is a particularly good idea if you know somebody who can aid in financing and has relevant expertise or knowledge in the field you're entering. If you know about running a business and you have a friend who has experience in the restaurant industry, then going in on restaurant franchising together wouldn't be a bad idea. Partnering up with someone else reduces the risk put on yourself.
You may also be able to find investors who don't want to put in hours of work but are willing to fund your franchise in hopes of reaping the rewards when it's a success. Finding an investor or a partner comes with pros and cons. While you have more funding and fewer risks involved, you are obligated to split the profits.
3. SBA Loans
Many new entrepreneurs rely on the Small Business Administration (SBA) for funding. This is because the SBA will often have an existing knowledge of the franchise that you are investing in and will take the business' history into account. According to Statista, in 2020, the economic output of franchise establishments in the U.S. was around $670 billion. The SBA understands that you are more likely to be able to repay your loan because of your franchise's positive financial record. They will also take a peek at your financial history. Many banks are partnered with the SBA, so you're likely to find a loan that suits your needs.
4. 401(k) Rollover
In order to receive additional funding for your franchise, you can make the most of your existing 401(k). If you have a well-funded 401(k), then you can do what the IRS refers to as ROBS, or Rollovers for Business Startups. You would do this by creating a 401(k) plan for your franchise's employees and transferring funds from your individual 401(k) over to it. Then, you would borrow back the funds and put them towards the start of your business.
Though this is becoming more of a common practice, the IRS doesn't always encourage it. If you intend to fund your franchise business opportunities by rolling over funds from your 401(k), it's wise to consult with an expert to ensure that you're doing so as ethically and by the book as possible.
5. Personal Loans
If you have a solid credit history and a positive relationship with your bank, then you may be eligible to take out a personal loan. This is often the last resort for many because of the associated personal risk. Should you default on your personal loan, your credit score will be negatively affected — subsequently affecting your chances of being approved for loans down the road.
Are you a homeowner? If so, then you may have established equity. You have the ability to borrow from that equity to invest in hot franchise opportunities. To do this, you would need to take out what is known as a HELOC, or a Home Equity Line of Credit. Repayment timelines, as well as interest rates, are typically fair when it comes to a HELOC. That being said, this is one of the riskiest methods of gaining financing. Should you fail to make HELOC payments regularly and on time, you could go into foreclosure on your home.
Why Wouldn't You Want to Pay in Cash?
If you have some money in savings, then you may be tempted to simply use cash to pay for your franchise business opportunities. Although this appears to be the simplest option, you'll find that not many entrepreneurs use their own cash to fund their franchise investments. That is because of the risks involved.
When paying for your franchise in cash, every dollar that you own may be tied into the business. You may not see a return on your investment in the first few years of your business opening, putting a strain on your personal finances. By working with partners or investors, you can afford to put a bit of your own cash somewhere else.
How Can You Prepare to Get Financing?
When planning to look elsewhere for franchise financing, there are some critical factors to keep in mind and specific steps that you should take. Ask yourself if you have:
- Looked at every financing option available to you
- Considered a rainy day fund
- Totaled up the amount you will pay at the end of your agreement
- Read your franchise agreement thoroughly
- Accounted for how much you will need for daily business operations
When applying elsewhere for loans, you'll have to draft or collect certain documents. These documents include, but are not limited to:
- Personal and business financial statements: Gather documentation of your cash flow, previous income, and personal financial statements. Additionally, you should present projections detailing your expected cash flow for the next six months to a year.
- Statement of purpose: This document will outline the amount of money you are asking for, the purpose of the loan, and the collateral offered. It should also include a succinct description of the franchise you are investing in, as well as the ways in which the loan will benefit your business endeavor.
- Business plan: This is a more thorough description of the business you are starting or investing in. This plan should include an organizational chart clearly expressing your business' employee hierarchy. It should also explain to lenders the services or products that you will offer, your marketing and advertising plan, and your financial projections. These projections should frame your estimated expenses and earnings — explaining how your plan for money management will be able to repay the loan. There are business templates available online if you're unsure of where to begin!
To find a franchise worth investing in, be sure to utilize the services offered by Best Franchise Networks! Once you've found the perfect franchise opportunity, you can start hunting for funding.
Carlo V. DeFalco
RELENTLESS Venture Studio
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