Franchise Buyer Guide
You've decided to reasearch owning your own business via franchise ownership, one of your first questions may be, how to I fund it? If you have enough cash saved up for the total investment then self funding may be the option, but for many this is not the case and addtional funding avenues are needed.
As you enbark on this journey of business ownership and franchising, first thing is to realise you is that becoming a franchisee of a franchise is really an investment. You are investing in something that could delviery cash flow and ROI over long period of time. Understanding this will help you better decide on how much money you want to invest, whiche franchise type (category, lifestyle, skill set) is right for you and which funding vehicle would be most efficent.
So How Do you Decide the Best Way to Fund your Franchise Investment?
There is no best answer to this question because every franchise varies and every franchise candidates situation is different. The way forward is to start with understanding your current financial situation. What is your net worth, your liquid capital, how much of this liquid capital are you willing to invest (which also comes with potential risks). Undertanding your current financial situation with help you narrow or broaden your franchise search. But first you need to understand some of your funding optons and some of the pros & cons of each of these options.
- 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.
Wow - there are many options to get your business funded. Contact us if you need more help, we are here to make your franchise ownership journey awesome.