During the investigative process of reviewing franchise concepts, you’ll be introduced to several business opportunities that align with your personal profile, lifestyle, and financial goals. The discussion, guidance, and deliberation in determining the best fit can become quite lively. The key question becomes which franchises under your consideration offer the best possible chance for success? But there’s another area of the investigative process that requires just as much attention and consideration. Want some good advice?
Put the same amount of due diligence and consideration into your funding options.
A savvy owner-to-be with an entrepreneurial mindset understands that buying a franchise includes initial fees, ongoing royalty payments, and the possibility of co-op fees for marketing, advertising, or promotions. Just the same, it’s also likely a savvy owner-to-be knows most common forms of franchise funding. We cover these traditional funding options below, but also include three lesser-known funding options you might want to consider.
Funding from the Franchisor
Many franchisors offer funding options to new franchisees, with some even offering to waive or discount certain fees to choosing this route. Or, they may already have a third-party funding source in place and will direct you to those resources. To get the clearest picture of franchisor funding, be sure to review Section 10 of each concept’s FDD for full disclosure.
Small Business Administration (SBA)
Before you can secure a loan from the Small Business Administration, the franchise you’re buying must be included in their approved SBA Franchise Directory. It means that the concept’s business model is eligible under the SBA’s affiliation rules and other criteria. The most common franchise funding option is the SBA’s 7(a) Loan Program.
Retirement Account Funding
Using funds from your retirement account, which can be combined with a spouse, partner, or other business loan, you can invest up to 100% of these funds to purchase a franchise without taxes or penalties. It’s called the Rollovers as Business Start Up (ROBS) program. You must have a minimum of $50K in eligible accounts to participate and it’s highly advisable to speak with your accountant or financial advisor to review whether this option is ideal for your situation.
That covers the traditional funding pathways, so now let’s look at three lesser-known funding options you may not have considered.
Portfolio Loans
Security-backed loans enable you to take a loan against the value of your investments, such as mutual funds. It leaves your investments in place for ongoing growth and the interest rate will be much lower than traditional funding options. However, there is an enhanced risk of emphasized losses, should your investments lose value.
Credit Unions
A good portion of the U.S. population have access to join credit unions through work or trade associations. Check your affiliations and networks to see if you’re eligible to access funds through a credit union.
Angel Investors
A cursory review of “Angel” investors on the interview will reveal a wide array of alternative funding sources to help you purchase a franchise. They may be an individual or a group, but the idea is to lend you the money required to purchase the franchise in exchange for a stake in the business. As a partner, they’ll have a say in decision-making, and their participation should be disclosed to the franchisor.
If you aren’t sitting on a nest egg of cash, you’ll need to seek an outside source to fund the purchase of your franchise. And while our specialty is matching you with the franchise that best aligns with your ownership dreams, guidance on financing and funding is another key service provided by FranNet’s qualified consultants.