Choosing to buy a franchise can be the first step toward business ownership. Many find being your own boss coupled with the high success rate of franchising highly appealing.
However, like any new business venture, buying a franchise requires more liquid capital up front than most people have. Here are some of the common financing options for funding a new franchise opportunity.
Many of the larger franchisors offer financing options to their franchisees. Franchisor financing can either come from the franchisor itself or from a third party that the franchisor has an established relationship with. For many this is a great way to go, but if the franchise that you have selected to invest with does not provide financing options, you’ll need to consider your other funding opportunities.
Banks and other lending and financing institutions make up the traditional sources of financing for any large purchase. However, in today’s current economy traditional financing can be hard to come by. Most large banks have tightened the requirements on which they are willing to lend and many people are finding it hard to secure financing through these traditional means.
The U.S. Small Business Administration (SBA) promotes the growth of small businesses. To encourage banks and other lenders to finance small businesses, such as new franchises, the SBA backs loans made to these entities.
The SBA will back up to 85% of the loan made to a new franchise. Many new franchisees choose SBA backed loans because they have competitive interest rates and can have a longer term than traditional bank loans.
Using your 401K or IRA to fund a new franchise is another source of possible funding. New franchises have a higher rate of success than a standard startup business, so you may find that the risk is worth the potential reward.
When withdrawing money to finance your franchise you don’t have to suffer the tax forfeits because you are reinvesting the funds. Setting up your new franchise as a corporation allows you to use retirement funds to buy stocks in your own franchise as a means of financing.
Finding investors to finance your franchise start up is a viable means of funding for a business, however there is a lot to consider here. Choosing friends or family to invest in your start up could turn your relationship sour should the business ultimately fail. With any investor it is important to have thorough, clear, detailed agreements in writing, regardless of who that investor is. With the details in writing, each party should know exactly what to expect from the business agreement.
If your home has retained its value or even increased in value, using the equity that you have built is another option for financing a new franchise. There are two ways to use home equity as financing, either as a onetime lump sum loan or as an ongoing line of credit. The down side of using your home as collateral on a new business is that you could potentially lose your home should your business fail.
Because there are so many options to finance your franchise start up, it is a good idea to research your options carefully to determine which will ultimately be the best fit for you and your new business.
Photo credit: dogsloverunning.com