FUNDING YOUR FRANCHISE
One of the most important decisions you will make in advance of franchise signing is how you finance this investment.
Consider your funding strategy early in your investigation process. Consult with professional funding providers who can help you understand your options, costs and strategies for funding your business. As your consultant, I can refer you to the top funding providers in the industry with a proven track record of success with my candidates.
There are several ways entrepreneurs finance their franchise investments. You need to fully understand your capital position before you sign a franchise agreement, so carefully consider your risk profile, working capital needs and future expansion plans before making a financing decision. Most franchisees will combine two or more sources of capital when starting a franchise.
FINANCIAL REQUIREMENTS
All franchise brands have financial requirements to qualify as a new franchise owner. These are unique to each brand and vary across all brands, industries and categories. Requirements are most often in the form of a liquid capital requirement and a net worth requirement. Some franchise brands include retirement accounts in your liquid capital requirement, while others do not.
There are always exceptions, but common rule of thumb thresholds for liquidity and net worth ranges based on common investment levels for various types of franchises include:
- SELF-EMPLOYMENT OPTIONS (<$100K): $50K – $100K liquidity | $150K – $250K net worth
- SERVICE-BASED BRANDS ($100K – $300K): $50K – $150K liquidity | $200K – $500K net worth
- LOCATION-BASED BRANDS ($300K – $600K): $100K – $250K liquidity | $500K – $750K net worth
- INVESTOR CLASS BRANDS ($750K – $3.5MM): $350K+ liquidity | $1.0MM+ net worth
COMMON FUNDING OPTIONS
CASH ON HAND
- This is often the safest, lowest risk and most common way people finance their franchise investment.
- By using idle cash or other liquid capital, you can avoid interest costs and debt service risks while putting your capital to work.
ROBS (Rollover for Business Startups)
- This IRS-approved method will roll over all or a portion of your current IRA or 401k balance into a new plan that invests in your company’s stock instead of the broader market.
- This is a very common and popular way for franchisees to diversify their investments, maintain their retirement balances and start a franchise without debt.
- You will need to work with a specialized custodian to complete this method, but I can refer canddiates to several quality national providers that work exclusively in franchising.
- This method is also beneficial for meeting SBA capital requirements.
HELOC (Home Equity Line of Credit)
- A home equity line of credit, or HELOC, is a popular way for potential franchisees to finance their investment.
- This is usually in the form of a second mortgage on your primary residence and can tap the unutilized equity in your home to put into your business.
- Common sources include large, money center banks and national mortgage lenders.
- There are no restrictions on how you use the loan proceeds.
- Terms typically include a 10-year term, the lowest possible interest rates, interest-only payments, and the flexibility of a revolving credit line.
PORTFOLIO LOAN
- For some franchisees with large securities portfolios, they find they can borrow against their portfolios without liquidating them and get very low-interest rates.
- Most banks or brokerages are pleased to provide portfolio loans at a low cost to investors.
- There are no restrictions on how you use the loan proceeds.
- Terms typically include a one-year renewable term, rock bottom interest rates, interest-only payments, and the flexibility of a revolving credit line.
SBA LOAN
- Most banks have loan programs that will loan to small business entrepreneurs with a guaranty from the U.S. Small Business Administration (SBA) under the SBA 7(a) program.
- SBA loans are typically relatively easy to get approved due to the government guaranty, although there is a lot of paperwork and meaningful fees involved.
- Community or smaller regional banks are often the best bet for finding competitive SBA loans.
- While the SBA has certain limits and requirements for the loans, there is plenty of variability in the terms you may receive from different banks, so it pays to shop around if you are seeking an SBA loan.
- Terms typically include a 10-year term, maximum interest rate of Prime+2.75%, a straight line of credit, and 10-20% equity down payment required.
UNSECURED LOANS
- Obtain loans without collateral, depending on your credit profile and business needs.
- These loans typically come with a slightly higher interest rate, but more flexibility and a quick close.
- Seek referrals for competent brokers or finance firms that specialize in this form of financing.
EQUIPMENT FINANCING
- Lease equipment from office furniture to company vehicles, with potential ownership for a nominal fee at the lease’s end.
- Fleet financing for acquiring vehicles is commonly arranged by franchisors in service-based industries.
- Other forms of equipment financing are available, depending on the equipment.
- If not available through the franchisor, seek referrals for brokers or competent financing firms that specialize in this form of financing.
FRANCHISOR
- Depending on the type of franchise and cost of buildout and/or equipment, the franchisor may have financing programs in-house or with a closely aligned program lender.
- This can often be the most attractive source of funding if there is no personal collateral required.
PARTNERS
- Many franchisees have friends, family or business acquaintances that are looking for business investment opportunities.
- Raising additional equity can fund a larger and more scalable enterprise.
- There are many variables and important business terms to consider before taking on a partner in a business, and you will want to explore the legal ramifications before considering a partner.
- If an appropriate partnership agreement outlining control, exit strategies, duties and obligations of each partner is completed, this can be another possible way to fund your growth.
