If you are considering buying a franchise, you’re not alone. This business sector is increasing in popularity, with more than 1,000 brands to choose from. This is one of the most common ways to become a business owner.
You will find that some low-cost options let you get in for an investment of around $5,000. However, if you want to get into a national brand, you’re going to need a much bigger investment- sometimes $500,000 to $1 million. This will likely be the largest investment you will ever make- beyond your house.
The question that often comes up is: “Where will the money for this purchase come from?”
The good news is, that you have options when it comes to getting the money for your franchise investment. Below, we’ll explore 7 of the most common ways to fund a franchise purchase.
7 Options for Franchise Funding
When it comes to obtaining franchise funding, the SBA loan is one of the most popular options. This is because the SBA is typically familiar with the franchise chain you’re investing in and will consider that along with your personal financial history. They partner with many banks, so they can help you find your best option. Since they have another entity to turn to if you default, financial institutions love SBA-backed loans.
Many people believe that true entrepreneurs launch alone- but this isn’t true. Many of them buy businesses with a partner, especially if they have relevant expertise to offer. When you have a partner, your risk is reduced. Also, you may be able to find an investor that is looking to make money on a proven franchise concept where they can work behind the scenes. Keep in mind, that this option is a two-edged sword. Your risk is decreased because you put up less money- but at the same time, you have to share your profits with someone.
If you will need expensive equipment to operate, an equipment loan can help. Some lenders specialize in this type of funding. Since these loans are secured by the equipment, they can be fairly easy to get. However, if you don’t make the payments for any reason, the equipment may be repossessed, which could shut you down.
In some cases, the franchisor partners with lenders to assist franchisees with getting started. If the franchisor has this option, it typically means fast loan approval and more favorable rates than you would be able to get on your own.
If none of the above works out, you may be able to go to your bank and take out a personal loan. However, this is only an option for those who have good credit. This is the primary reason many people turn to crowdfund. The risks are much higher with this option because if you default, it affects your credit score and your ability to borrow later on.
This option for franchise financing is becoming more common- even though it puts your retirement fund at risk. Many times, franchisees are coming from corporate jobs and have a 401(k) plan. They do what’s called Rollover as Business Startups, or ROBS, which is where your new franchise creates a 401(k) plan for employees. The funds are transferred from the old 401(k) into this new one and then borrowed back out to launch the business.
If you are a homeowner with equity built up, you may be able to borrow against that equity to purchase the franchise. This is usually done by taking out a HELOC (Home Equity Line of Credit). Typically, rates/repayment schedules are good. However, there is a downside: if you don’t make the payments, you risk losing your home.
Why Would You Not Use Cash?
After going over these options, you may be wondering why you would not just use cash if you have it available. The truth is, very few franchisees use cash to fund the buy-in due to the risk it entails.
If you use cash, your money is tied up in the business and it’s important to understand that most of the time, you will not earn a return for the first 1 to 2 years. However, if you use one of these other options, your cash is free to be used elsewhere.
As you see, you have several options when it comes to franchise financing. Be sure to carefully consider your options and when you’re ready, contact Sterling Capital Consulting to move forward on your franchise investment.