Once you have decided to join the millions of franchise owners, understand that you will need money. Setting up a franchise can cost you thousands or even millions of dollars based on your type of business.
While most franchise opportunities require you to own a substantial asset or net worth, do not get disheartened about franchise financing because investment options are readily accessible.
Financing from the Franchisor
Some prospective franchisors offer financial help to new franchisees. They may even have ties with commercial banks and other lenders to help set up your business. Companies agreeing on such funding will have all the information on their website.
The franchisor must also furnish the federally-mandated Franchise Disclosure Document (FDD) at least 14 days before the franchise purchase. FDD is a document containing extensive information about financing options offered by the franchisor.
The Small Business Administration offers loans to franchise opportunities with attractive terms and rates of interest. However, they are not loans in the real sense. SBA partners with financial institutions and acts as a guarantor, should you default.
You will have to meet the financial institution’s requirements and that of SBA to qualify for these loans. The application process is extensive, and it is imperative to have a good credit rating.
SBA 7(a) Loans
As the most popular choice, these loans help you acquire equipment, working capital, inventory, and other necessary assets. However, note that they cannot sponsor a royalty fee or finance an ongoing franchise. The lender typically determines the interest rates and may vary between 7% to 9.5%.
The SBA 504/CDC Loan
These loans are giving out for a particular task performance – like renovating or purchasing fixed assets. They range in large amounts, and the repayment period may vary between 10 to 25 years. They are unlike the 7(a) loans where there is a single financial partner.
The 504 loans have three contributing parties: the borrower, a Certified Development Company (CDC), and a bank. It adds to a certain level of complexity, and the interest rates may not be as straightforward as the 7 (a) loan. Nevertheless, they are known to vary between 4% to 7%.
Franchise funds may be availed against your 401(k) or 403(b) retirement account. While you may not borrow against an IRA, the franchise can be bought using Rollover for Small Business (ROBS) or through a fund withdrawal from ROTH IRA. Nevertheless, dealing with retirement funds can be risky, and hence it is advised to consult a tax professional.
Starting a new venture may be as simple as borrowing from conventional credit unions and commercial banks. Lenders often prefer financing franchise opportunities over new businesses since franchisees are trusted to have a transparent business model and brand value.
However, you are not exempted from the banks’ lending policies and underwritings. They review your credit history and net worth for determining the loan repayment capabilities. In some instances, you may even have to provide collateral for securing a business loan.
Financing your franchise venture can get you plenty of funding solutions. However, every franchise is unique in requirements and has varying costs. Hence, it is better to analyze the options and choose the one having a reputation for working with a franchise business.