How to Finance the Start of a Franchise
Deciding to start a business is exciting, but depending on your business plans and expectations, finding financing can be difficult. Choosing to buy a franchise can help, especially if it is an established brand with a loyal consumer base, but that does not eliminatethe difficulty of finding a suitable lender, especially with the current tight regulations and lending practices.
A great option for financing is from the franchisor directly. Granted, this is not offeredthrough every franchise, but a growing number of reputable businesses are offering this potential funding solution. In fact,several companies even help to guarantee the loan in case of franchisee default. If interested in franchisor funding, then look under item 10 of the FDD to see if it is offered.
The Small Business Administration offers partial guarantees to third-party lenders to help reduce the risk of lending to new ventures or franchise developments. Many franchisors are approved by the SBA, meaning that the loan process is streamlined,not guaranteed. The 7(a) loan program is the mostbeneficial program for franchisees and has a cap of $2 million.
Family and Friends
While it is a niceidea to partner with family or friends in a business venture, it is vitalthat the details of the partnership are laid out in a legally binding agreement. These agreements offer clarity and specify obligations, which help to avoid potential personal and professional conflict later.
Many online lenders maybe happy to work with a new franchisee, but not everyone is aware of this potential marketplace. There are several websites available that act as intermediaries between lenders and borrowers. Essentially borrowers create a loan request, the intermediary sitethen poststhe request to its pool of potential lenders to find a suitable loan match, which can be a line of credit, bank loan, SBA loan, etc.
Retirement and C Corporation
One of the last and most risky options available to a franchiseeis to use their retirement accounts. Now, since there are penalties for removing these funds early, they can establish a C corporation, which would then be the owner and operator of the business. The franchisee can then roll their retirement accounts into the corporate account, investing it into the newly formed company.
A franchise is a great opportunity, especially when it is a well-established brand with a loyal consumer base. While funding may be difficult, there are several financing options available for the savvy franchisee.