The most important step, if you are seeking financing to buy a franchise, is to create a business plan. Banks, private lenders, and most money sources require a complete, vetted plan to decide on the credit worthiness of your business.
A thorough business plan explains how the money will be used, the state of the industry, a market analysis, the marketing and pricing strategies, your financing sources and costs/sales projections. Many resources are available to help you develop the business plan including the franchisor you are considering.
If you are considering financing a new franchise business, there are many routes you can explore to finance your dream. Below are five of them:
- Leasing- If your franchise involves equipment, you may want to consider leasing instead of purchasing it. Leasing allows you put your working capital elsewhere and also preserves your lines of credit. This way of financing has been used by franchises where the vast majority of start-up costs include fixtures, equipment, signage, or other tangible assets that can be put on a lease.
- Securities-based credit lines- Use your stocks, bonds and other securities as collateral to obtain a line of credit (LOC). This is not reported to your credit bureau.
- Unsecured LOCs- There are programs available that will offer you a business LOC to fund your franchise. You pay a percentage on the loan, very similar to a credit card. No down payment is required and it is not reported to your personal credit.
An important aspect of business is to have controllable and predictable monthly costs so be careful about adjustable rates which can go up dramatically. If you’re making a decision to finance your business with debt, make sure you know what the servicing of the debt each month will be. If your interest cost takes an unexpected jump this could negatively affect the breakeven sales you need, increase pressure to raise prices and/or diminish what you can pay yourself.
- Secured LOCs- An example of a secured LOC is to take out money against your home equity. If you owe $70,000 on a home worth $200,000, you may be able to get 80% of the difference or $100,400 in this case. Some see this as a risky strategy because if the business fails, it could impact repaying on the equity loan, possibly putting the home in jeopardy.
- Retirement Funding- You can use your 401k or IRA to fund your business and not incur any taxes or penalties. This is not a loan you have to repay as your 401K or IRA becomes the banker. But you will need to form a C Corporation to be held in your 401K/IRA as an asset. It is wise to find legal counsel because the C Corporation has to be formed correctly to avoid taxes on the money you use.
- US SBA (Small Business Administration) Loans- The SBA offers low interest government loans designed to spur business growth. The loan is made by a bank or financial institution and the SBA guarantees the loan. There are numerous qualifying requirements to get an SBA backed loan. (Note: A recent report co-authored by the International Franchise Association (IFA) stated that lending to franchises from the SBA has increased 60% from the previous year.)
- Private Angel Lending- These are private investor sources who tend to be pro-franchise. It’s faster and easier to obtain a loan this way than it can be through conventional sources. There also might be more flexibility in terms such as down payment and interest rates. The challenge is finding and inspiring the Angel with a compelling, logical business plan or having a friend or relative who believes in you and your business plan.
- Crowdfunding- Crowdfunding sites consist of groups of people willing to fund worthy business ventures. This is internet based and is used in efforts such as disaster relief, political causes and artist support. It is a relatively new phenomenon for businesses.
KIVA is an example of crowdfunding but it focuses on lending to overseas businesses. So, when you go on that site, you might see a food vendor in Uganda who needs $200 to help buy a booth to display his wares. According to the site, most of the loans are repaid.
For US businesses there are different types of crowdfunding and while it can be a good source of money, there may be some pitfalls, one of which is that the process is very public.
There are many financial firms that offer business lending. A broker that specializes in finding funding for franchisees, for example, may have several alternatives for you to peruse. The broker will help explain all of the financing avenues so you can make a good decision. Some of these brokers also assist writing a business plan for a fee. One online company that does this is www.biz2credit.com. Their business plans are detailed and cover the things lenders want to see.
Do your research to find out which funding source is best for you but make sure that before you do anything, prepare a bullet-proof business plan. It will be difficult to obtain most types of financing without one.
Let us know funding experiences you’ve encounter. There is an enormous amount of capital sitting on the sidelines waiting for the right business to lend to.
