5 Top Franchise Financing Options Discussed
A perceived obstacle that sometimes is mentioned from candidates I work with as a franchise consultant is this: "What is the best way to finance this franchise business venture?" This is a very legitimate question that needs to be addressed. A few, less-than-serious franchisee wannabes have absolutely zero clue of where they'll get the money or even how much of an investment is involved. The vast majority, however, have at least some idea of how they will finance their business. They simply need some clear, concise information about what each option entails. Here are 5 franchise financing possibilities and what they entail:
1. SBA (Small Business Association) Loan. This is a great place to check out because the SBA offers favorable terms and recognizes the importance of our nation's small businesses. They provide competitive rates, no points, and no penalties for pre-payment. As a potential franchisee, you may qualify for an SBA loan, based on criteria such as number of employees, business size, and annual sales. Theirs is a simple and straightforward process as compared to other options.
2. The Franchisor. This should be one of the first questions you ask your franchisor during your due diligence process. Their may already be pre-approved lending relationships established with banks or other third party institutions that you, as a franchisee, can utilize. Also, keep in mind that the franchisor has a vested interest in your success, so you should ask if there is a franchise funding program in place for franchisees to take advantage of.
3. 401k Or Retirement Fund. Initially this may appear as an unlikely or scary source to tap into. I would not recommend considering this option for an independent business start-up. However, because of the overall high success rate of franchising, this source can actually be a wise business move, as you are re-investing the funds, not withdrawing them, which, of course, would involve stiff tax penalties.
4. Other Investors. This could be a viable way to go, especially if the franchise you're buying comes with a very popular brand, as the likelihood of success increases substantially. Be sure that your proposal is detailed and includes your business plan and specific goals, along with your past accomplishments and achievements, via other business ventures or employment.
5. Family And Friends. Maybe you are especially close with a certain relative who is well-capitalized and would be willing to loan you the money for your franchise business. Or perhaps you have financially assisted a friend in the past and he or she has been waiting for an opportunity to return the favor. Be careful here, though. If you do choose this option, make sure that the agreement is in writing, and is clear and concise. It's not worth losing a friend or a close relationship over money.
Whatever you choose, do your homework. Shop around. Consult with your accountant. Discover what programs are available that best fits your specific situation. As you can see, there are plenty of solid options to choose from.