For those who are considering franchising, one of the most common questions is “how much money do I need?” While every franchise has different ways of handling franchise fees and startup costs, having a good idea of what you are investing and where that money will come from will be helpful as you survey your franchising options.
Thankfully, for hopeful franchise owners, there are quite a few ways to secure funding, and many owners are able to use a combination of the methods to have the collateral they need to invest.
Here are the franchising financing options to consider if you are hoping to become a franchisee:
Franchisor Financing
No one knows the cost of starting a new franchise better than your franchisor, so this is always the best place to start. There are many businesses that offer to finance to franchisees, not only for the startup fees but even for equipment and other smaller things that might not be included within a traditional loan.
While this is convenient, be sure to have a qualified franchise lawyer look over the agreement to make sure the terms are sound.
Small Business Association (SBA) Loan
Because of the way SBA loans are structured, lenders are able to offer extremely competitive interest rates and repayment options to those who have the financial history to qualify for them. Though the qualifications are typically high, if you are eligible, an SBA loan might be worth pursuing.
Traditional Bank Loan
Similar to a student loan or mortgage, a traditional bank loan is set up the exact same way except with the funds being designated to go toward your franchise instead. Typically, the bank will want to see your franchise business plan and review your credit history to determine your eligibility for the loan.
Alternative Loan Options
Alternative loan options are great for franchisors who qualify for a loan that will not cover all of their investment expenses or have some other extenuating circumstances involving their funding. Typically awarded for smaller amounts on more flexible terms, alternative loans often carry higher interest rates or service fees than other options but can be useful.
401(k) Financing
One of the most frequent questions we receive from clients about buying a franchise is how to make use of their 401(k). This method, known as 401(k) Financing or ROBS (Rollovers as Business Startups), allows potential business owners to transfer their existing 401(k) to their new business and direct how the money is invested.
While the IRS has very specific protocols for doing this correctly, it can be a useful option to examine if you are interested in making use of the funds in your retirement savings.
When you’re considering funding options for your franchise, it is important to have a qualified franchise lawyer assess your contracts—that’s why we’re here! Get in touch today so we can help you evaluate your options.