5 Ways to Finance a Franchise
These resources can help you secure the necessary funds to cover the initial franchise fee, startup costs and the ensuing royalty payments.
Franchises come in all shapes, sizes and levels of financial commitment. Finding a franchise ownership opportunity that's just right for you is the most important factor — followed closely by paying for it. How will you secure the necessary funds to cover the initial franchise fee, startup costs and the ensuing royalty payments? Thankfully, there is more than one way to get funding for the franchise of your dreams so that you can finally become your own boss.
To provide you with an array of funding choices, here are five ways to finance a franchise.
1. Ask for a 7(a) with the SBA
The U.S. Small Business Administration offers one of the most popular funding options for purchasing a franchise: the SBA 7(a). You should understand that the SBA doesn't generate the loan itself, rather they partner with banks and other lending institutions to guarantee one. SBA 7(a) loans can go up to $5 million and repayment terms are typically 10 years. If you intend to go this route, make sure you explore an SBA lender that understands the industry of your franchise. The application process for SBA 7(a) loans is notoriously in-depth, so make sure you have all your paperwork in good order.
2. Your personal bank
Banks and credit unions are always open to loan applications for franchisees and hopefully you're on a first-name basis at your lending institution. Depending on your banking (and repayment) history, you might be able to receive favorable terms on the amount and interest rate. Banks tend to like the nature of franchises, especially noting their proven business models. To give yourself the best shot, do your homework. Have your business plan and pro forma ready to roll, then see where the chips fall.
3. Your franchisor
Many franchises offer their own financing options when welcoming a new member to the family. If you decide to go this route, at least you know how well your lender understands the business model and its income-producing capability. If nothing else, the loan amount should be quite accurate. If your particular franchise does offer its own financing, you'll read about it in the franchise disclosure document (FDD). Skip ahead to Item 10 to find out.
4. Alternative lenders
Banks and credit unions aren't the only game in town when it comes to securing the funding necessary to buy the franchise of your dreams. There are quite a few alternative lending options for you to consider, with some that specialize in franchise funding. Guidant Financial and ApplePie Capital are two examples that work with a lot of franchisors. Get your credit score up to date and find out what they're offering. Then you can compare their terms with your own alternative lenders.
Seems a bit weird that a financing option would go by the acronym of ROBS, but this method of funding is becoming an increasingly popular option for buying a franchise. It stands for Rollovers for Business Start-Ups and it's a plan where you can withdraw money from your personal 401K (or similar tax-advantaged retirement account) to fund the purchase of a franchise or small business. Under normal circumstances, a pre-retirement withdrawal from your 401K would cost you a pretty penny in penalties, but the beauty of the ROBS option is that you won't in this instance. Borrowing from your 401K is always a risk, so it's best to seek the counsel of a professional CPA or your financial planner before pulling the trigger on this option.
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