Franchise Funding Options You May Not Have Considered Exploring the various financial routes to entrepreneurship.
By Jeff Cheatham •
Opinions expressed by Entrepreneur contributors are their own.
The landscape of the commercial lending industry has evolved, matured and grown over the past few decades, leading to more options for consumers looking to finance the purchase of a small business. As an industry, franchising has benefitted from creative sources of funding. Even if you don't have a nest egg or a few hundred thousand dollars under a mattress, candidates have more options to fund a franchise than ever before. Granted, we're typically talking about a significant figure, so it's best to understand various funding routes that can help you establish an entrepreneurial future. For further reference, be sure to check out Entrepreneur's Top Franchise Suppliers page and click on the Banking/Financing tab.
Related: The 6 Best Financing Options for Franchising a Business
Your tried-and-true options
Provided your credit rating is in excellent health and your collateral options are solid, your personal bank could provide all the funding you'll need to get started. The same goes for credit unions — provided you have this option — and you may even secure a more favorable interest rate on the amount borrowed. Lots of franchisors offer financing for candidates joining their systems, and if you choose this route, you might be able to get certain fees waived or discounted. Almost all will offer to help you find third-party funding, especially if they already have a financing partner for the brand. Section 10 of your FDD should provide an answer. Another option is the Small Business Association's (SBA) 7(a) Loan Program, which finds funders for small businesses that meet the agency's requirements.
Alternative lenders
Even when a majority of funding has been secured, there are some candidates who require additional financing to get across the finish line. This situation is ideal for alternative lenders — financial partners who offer less stringent requirements and quick turnarounds. Most often, you can select the type of funding that best applies to your situation, including lines of credit, equipment purchases and term loans. Alternative lending products typically involve a higher interest rate and shorter terms, but that's the price you pay for convenience.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
401(k) retirement funds
For certain candidates with an established and healthy retirement fund, the Rollovers for Business Startups (ROBS) could be an advantageous way to self-fund a franchise. The ROBS option allows you to tap into your retirement fund to start a business or buy a resale opportunity. The money you'll withdraw isn't considered a loan and it can be done without income tax penalties. There are certain requirements you must meet, along with clear-cut instructions for participating in this type of transaction. The ROBS funding option has been around for 40 years and helped thousands of entrepreneurs but, a word of caution: while there's an upside to accessing your own hard-earned money, this funding option comes with its own set of risks and concerns. It's highly advisable to speak with your financial planner or CPA to determine whether this financing route is best for your personal situation.
Crowdfunding
As you're well aware, not everyone has a credit score above 750, but even if you do have a blemish on your credit rating, there are options you can review such as crowdfunding. Popular crowdfunding partners such as Kickstarter allow you to make your business ownership pitch to the masses. It's extremely popular with the younger generation — millennials in particular — and financing experts believe the market for this avenue may reach nearly $100 billion in funding by the year 2025. Make sure your pitch is clear, with a demonstrable value proposition.
Family & friends
When all else fails, you can always count on family and friends. Well, maybe not always, but those who know you best — along with the motivation and ambition you exude — may be your most favorable option to secure the funding you need to get a franchise operation off the ground. If you can demonstrate the value proposition of your new business venture, you may wind up with crowdfunded income from those closest to you. It's advisable to share expectations and repayment terms in writing. That way, you stand a better chance of not losing any friends and family in the off chance that your venture doesn't work out.
Related: Impact Of COVID-19 On Startup Funding: How To Raise Capital During a Crisis?
