Franchise financing can be difficult, but there are many funding options available for the potential franchiser. If you own a business and are looking for a way to expand your operations, franchising is a possible opportunity. There are several solutions for franchise funding. Read on to find the one that works best for your business.
The Franchisor Company
It may sound obvious, but one of the most common sources of franchise financing is a franchisor or franchisor financing company. Many U.S. franchisors will take on a piece of the loan through their company. Predictive analytics can help the franchisors see if the investment is profitable. They will even sometimes help with franchising fees, equipment costs and other charges that your business may encounter. This is ideal, since the franchisor will cover a lot of the costs and understand the process. However, the amount franchisors contribute largely depends on the specific situation. Do your research on the franchisors, and be sure you fully understand the terms of the loan.
Seek SBA Loans
Small Business Association Loans are a great way to finance your new franchise. If a franchise is SBA approved, it makes it easier for you to get a loan. Your business must operate in the U.S., have invested equity and have little other financing options to qualify for a SBA loan. You will also need a good credit score. If the company is higher up in franchise rankings, then it could help loan application as well. A SBA loan can give your potential franchise up to $5,000,000. Thousands of franchise businesses use SBA loans, but you need to make sure you meet the requirements to apply.
Acquire A Partner or Investor
If your new franchise needs cash and you are willing to bring in another person, consider a partner or investor. A partner can be a friend or family member. Angel investors might also be willing to invest in your franchise. When pitching your franchise to a new partner or investor, make sure you have a solid franchise plan and financial projection. You should ask acquaintances or even your franchisor if they know anyone willing to provide you with the capital to start a franchise. If you have can raise the money by yourself, it gives you more freedom. A partner of investor funding your franchise can allow you to usually have a lower interest rate and higher loan.
If you have retirement funds, you can use that money to finance your franchise now. Depending on the type of retirement account you have, you may or may not be penalized for withdrawing this capital early. For a traditional IRA account, that penalty is 10% of taxable dollar, but there are many factors that affect additional penalties. If you think the opportunity for franchise return is high, you may decide the withdrawal fees are worth it. However, there is also an option to open a rollover account. This eliminates the penalties and lets you use all the capital for your franchise. You can’t do this with a Roth IRA account. Be sure to weigh the pros and cons before playing with your retirement funds to finance your franchise.
Banks are often happier working with an established business or a developing franchise compared to a startup, but that doesn’t mean they will necessarily give you a loan. Bank loans require you to register a business name, have a solid credit score and complete all the necessary paperwork. You must present your franchise well to obtain funding at a commercial bank. If you decided to borrow a bank loan to fund your franchise, you would pay back the loan and interest according to a schedule. They might give you the option to autopay from a free checking account. Compare your options between banks and private lenders to determine what deal best suits your franchise.
One of the best ways to determine whether or not franchising is right for your business is to hire an attorney or franchise consultant. If you aren’t able or don’t want to do that, you can use these solutions to find franchise funding. Start with your franchisor or International Franchise Organization. Then, find alternative lending sources like SBA or bank loans. If you are willing to go into business with someone, a partner or investor can be a strong source of income. Your own retirement fund can even help fund your franchise through a rollover account, but it’s important to be careful with your future funds. There are several solutions for franchise financing, but these options can give you a good start to secure funding.