How to Fund a Franchise Purchase
If you’ve decided that you want to buy a franchise, one of the first questions you may ask is how to fund it. Ideally, you have enough cash saved up for the total investment outright but in many cases, additional funding is needed.
When seeking a franchise to buy and how to fund it, the first step is remind yourself that buying a franchise is really an investment. You’re really not getting into it to just own it but rather to invest in something that will deliver cash flow and ROI over the long term. Gaining clarity about that will help you better decide how much money you want to invest up front, which franchise type is best for you and which funding method will be most successful.
How To Decide the Best Way to Fund a Franchise Investment
According to franchise expert Merri Cronk, “There is not one best answer for how to fund investing in a business, because every franchise varies.” Merri, who owns FranNet Central TX and West Texas/Rio Grande Valley says that getting funding depends on many factors. “Your personal financial situation, the amount of money you need, the franchise investment and how much risk you are willing to take on should all be considered prior to making a decision.”
The best way to figure out the option that will be most successful for you is to start with a thorough review of your current situation. First, assess your net worth and liquidity to see if you have the reserves necessary. Next, spend some time thinking about your priorities, assets you want to protect and your personal comfort factor with the potential risk of various funding methods.
Next, begin reviewing the pros and cons of each option.
Here are six ways to fund a franchise courtesy of Benetrends Financial:
- Self-funding – Personal savings/Use of retirement funds/ Credit card
- Personal savings – The easiest option to fund a franchise is using your personal savings. There are no strings attached so you will have more freedom to make your own decisions. However, if you end up draining your accounts and more cash is needed, you may not have the assets needed to get a loan.
- Retirement Funds – If you choose the self-funding method but you don’t have enough cash readily available, the IRA/401k rollover method offered by Benetrends is a great option because it allows the money to be used for your business growth, while maintaining your retirement funds and eliminating all the fees and taxes associated with cashing out an IRA/401k. The downside is that if your business ends up struggling, your retirement funds could be at risk. If you decide to use this option, be sure to use an organization like Benetrends to make sure it’s set up and maintained properly.
- Credit Card – Another option is to use the available balance on your credit cards. While this is an easy way to go, it many times ends up being one of the most expensive due to high interest rates. Maxing out credit cards can also leave you in a situation where you can’t obtain additional funding.
- Family and friends – Many times relatives and friends are willing to invest in your business for a percentage of the profits or regular loan payments with interest. As long as business is going well and you can pay back the money, this can be a great option. However, if the business is not making profits as fast as projected and you end up not being able to pay on time, this can lead to unhappy family dynamics at the Thanksgiving dinner table. One way to lessen the burden on family is to use a crowdfunding site that allows you to collect funds from friends and small investors in addition to relatives.
- Franchisor loans – In some cases, franchisors will finance all or part of the loan for you to invest in their franchise. One advantage of this system is that it’s easier to get approved than outside loans and the franchisor will guarantee the loan in many cases. However, the terms vary greatly among franchises so it’s best to review other options as well before working out the details with the specific franchise you are purchasing. Also, very few franchises offer this as an option.
- Bank Loans – Traditional bank loans can be challenging to get because the failure rate of businesses is so high. However, the likelihood of getting approved is much higher if your loan is backed by a personal asset such as your home or property. A home equity loan can serve this purpose but you could lose your home if your business struggles.
- Small Business Administration (SBA) Loans – While these government-backed loans are actually made by traditional banks, the good news is they are easier to get because the SBA backs a portion of the loan. There are several types of SBA loans available. To learn more about them and determine which one is best for you, visit the SBA website.
- Micro Loans – These loans are usually between $35,000 and $50,000 and are often provided by non-profit community organizations. The pros of these types of loans are that the lending organization usually provides assistance and training for the business owner to maximize their ability to succeed. A con is that many micro lenders require you to personally guarantee the loan so it can be risky if the business isn’t successful.
As you can see, there are many great options to get the funding you need to invest in a franchise business.
If you would like more details and personal guidance on the best funding options for your specific situation, we welcome you to contact one of our FranNet consultants. They know the market inside and out and have a great track-record of assisting individuals on their path to entrepreneurship. The best news is that they provide this guidance free of charge. To find a consultant in the Central, West Texas or Rio Grande Valley, click here.