#1 In-House Financing
As part of developing your funding strategy, ask early if in-house financing is available. Many franchisors offer tailored financing solutions specifically designed for their franchisees, either through lender partnerships or directly from the franchisor themselves.
A few examples of in-house financing options would be assistance with up-front franchise fees, the FF&E package, specialized equipment required, or help with the initial marketing spend.
Franchisor financing is most commonly available with well-established brands that have significant financial strength. It's also a sign that they have a firm handle on the predictable costs of starting their business and reaching cash flow positive, as indicated in item-7 of their FDD.
While all agreements differ, some require as low as 25% cash injection and could include deferred payments. It's always wise to have legal or financial professionals involved when reviewing these agreements.
#2 Retirement Rollover
Rollover for Business Startups (ROBS) is a way for qualified individuals to leverage their retirement funds to start a new business without penalty or tax implications.
Historically, we've had the option to move our retirement funds to an IRA or a new employer's retirement program when making a change. In this case, you are simply investing in your company instead of someone else's.
For example- If you worked for Microsoft and decided to invest your own money in their stock program, the cash you invested in their stock would become the property of that company. They could use it for any legitimate business purpose, including payroll, acquisition, equipment, etc.
In a ROBS program, you invest in your new company by creating a new retirement program within it. It becomes a stock purchase in your new business, and you too can use that for any legitimate purpose you need, including your salary.
While this isn’t be the best option for everyone, it does allow access to cash to fund a business startup that you may not have otherwise had. And what better investment to make than in yourself?
#3 SBA Loans
The most popular option for franchising is the SBA loan program. SBA loans are partially backed by the SBA and funded by 3rd party lenders.
SBA loans are structured likes traditional loans. However, since the SBA reduces the risk, lenders are incentivized to offer more loans with lower interest rates and longer repayment terms.
There are many SBA loan options, including:
· The Standard 7(a) loan (up to $5M)
· 7(a) Small Loan (up to $350K, up to 85% SBA guarantee)
· SBA Express (accelerated turnaround)
· 504 Program (business growth & job creation)
· Veterans Advantage Program (reduced fees)
SBA loans are granted to businesses and never to individuals. Repayment periods are typically 7 to 10 years, in some cases up to 25 years. The fees, interest rates (capped by the SBA), and personal guarantee percentage are negotiated between the borrower and the lender.
Typically, the financed project assets are used as collateral, and personal guarantees may be required in addition to a cash injection of 10-30% of the project total.
#4 Home Equity vs. HELOC Loans
One quick and relatively easy way to access cash for your business venture is by leveraging equity from your home.
Equity is simply the difference between what you owe vs. your home's current value, where an appraiser approved by the lending institution determines the value. For example, If your home is valued at $400,000, and you have a $200,000 mortgage balance, your equity would be $200,000.
Typically you can borrow up to 85% of your home's value minus any outstanding mortgage balances. These loans can fund business expenses, including startup costs, new equipment, facility upgrades, or even purchasing an additional property.
Most home equity loans have a fixed interest rate, loan term, and monthly payment amount. Home equity lines of credit (HELOCs) generally come with a variable interest rate, usually lower than a home equity loan. HELOCs allow a borrower up to 10 years to withdraw funds and up to 20 years to repay the loan.
#5 Friends and Family Loans
While tricky, friends and family loans are more common than you might think. Recent reports show that roughly one out of three people have borrowed money from friends and family, and more than 80% of people polled would be open to lending.
When done right, these types of loans can be beneficial for everyone involved. Whether you are looking to fund your business with debt or equity, do your homework, and have a solid plan in place before approaching the people closest to your heart.
The more work you do on the front-end, the better. Draft a clear contract that includes all of the terms and expectations. Push yourself to remove the emotion, and ensure everyone understands the agreement to prevent problems down the road.
#6 Portfolio Loans
Portfolio loans enable you to leverage up to 80% of your stock, bond, or mutual fund value without having to sell them. Your investment portfolio secures these loans rather than your home equity, etc.
This financing works like a revolving line of credit, typically closes within 10-15 days, and offers interest rates lower than many other business financing options. While you must have a minimum of $85K in your portfolio to use this option, you can leverage these funds whenever you need them with no additional restrictions.
Some other benefits include:
· Maintaining the value of your portfolio
· Borrow and pay interest based only on what you need
· The setup fee can be part of the borrowed amount
· Easily combined with other forms of financing (SBA, ROBS, etc.)
· Your credit score is not a factor
#7 Commercial Loans
A common way of financing a franchise is through a traditional bank term loan. This example is outside of an SBA guaranteed loan product. Like a home mortgage or a student loan, the lender offers you a set amount of cash for your project, which you repay in monthly installments over a set period of time.
The approval process is pretty standard. However, the lender carries full responsibility for this type of loan, so be prepared to provide collateral. They will review your business plan and credit history to decide your creditworthiness and ability to pay back the loan.
When possible, personal experience matters. The more you have done with the lender (personal or business bank accounts, mortgages, etc.), the more likely you will be approved. And as with any loan, the stronger your credit score, the better the terms and interest rate will be.
Some franchisors have preferred lenders that know their business model well and offer special financing packages. Examples might be funding for FF&E, construction, or special equipment. Make sure to inquire about this option during the investigation process.
#8 Alternative lenders
Suppose you need money to fund your franchise quickly or want to secure additional capital to supplement your commercial or SBA loan. In that case, you might consider an alternative lender option.
Typically, these lenders have less stringent requirements and shorter turnarounds than traditional financing options. They also offer various loan options, term loans, business lines of credit and equipment financing packages.
Like many things in life, this convenience may cost you. These products can to be more expensive, offer shorter repayment terms and lower loan amounts than other options. This might be a good options if need to supplement your existing financing, can't qualify for a bank or SBA loan, or need cash quickly to jump on a life-changing opportunity.
#9 Investment Groups
An investment group can be a corporation, partnership, business trust, or limited liability company (LLC) that pools money from a group of investors, including options like family offices and private equity.
The investment capital is pooled and invested in the business or a portfolio of companies. The investors then share any profits and losses incurred by the company based on each investor's interest.
Investment groups exchange capital for a portion of the equity, meaning they buy shares in the business venture. As some do, the investors stand to lose some or all of their investment if the business fails. However, franchising is attractive to many investment groups given the business track record, tools, systems, and support.
#10 Personal/Private Line of Credit
A personal line of credit is an open-ended loan that allows a borrower to withdraw funds for a set period of time.
The funds are accessible through bank transfers or line-of-credit checks, and the borrower works off of an established credit limit for the loan term.
This may be a wise choice if you're expecting significant expenses and qualify for a lower interest rate. In either case, try to keep your total credit charges to no more than 30% of your available limit, as this will help maintain your credit score.
While personal loans can be easier to budget for, personal lines of credit offer flexibility. And with a line of credit, you can borrow, repay the funds and borrow again as needed.
Franchise business ownership can be a great way to get out on your own or diversify your investment portfolio. As part of our free service, we'll introduce you to experienced lenders who specialize in funding franchise businesses to help identify the best options available for you.
If you are interested in learning more, check out www.franchisesuccesspartners.com or schedule a time to connect here: www.calendly.com/myfranchoice I would love to hear your story, and help you figure out if franchise ownership makes sense for you!
Don Taylor, Franchise Consultant
Call/Text: 303-548-9475