Once the excitement of deciding to open your own franchise settles in comes the next question: “How will I fund my new business?”
One piece of advice we give our candidates over and over again is to start this process early, well before you get approved for your franchise. Unless you will be starting your business with cash from your savings account, the method that you assemble your funding will play a critical role in your game plan.
Developing a funding plan may help to determine how many units or territories you request for approval. Finding the right financial team, and they are some stellar companies out there, can make a big difference in your growth plans.
Here are the most common ways we see people assembling their funding plan:
- SBA Backed Funding – The SBA has created a number of programs to assist new and growing business owners with funding. Most commonly used are their loan programs. In these cases the SBA takes the position as a loan guarantor and provides security to what are often local lenders that write those loans. You could go to a bank in your neighborhood and ask them if they offer a SBA loan program but going to lenders one by one can be very time consuming. My suggestion would be to use a loan broker to help you apply with multiple carefully targeted lenders across the country that are most likely to loan given your financial scenario or because of the franchise brand you are buying. This approach lets you fill out one application for multiple lenders and have one point of contact. The SBA also has less used surety bond programs and venture capital programs.
- Conventional Loans – There are conventional loan programs out there that are not SBA backed but very much worth considering. These may be available through local lending institutions or National lending brokers. If you are a new business owner you are likely to be directed to SBA options as they reduce risk for the lender. Conventional loans seem to be more often used for growth capital for existing operators.
- Retirement Rollover – This is an approach that we have seen a handful of companies evolve over the past decade, or so. The idea with this approach is to use your retirement funds from past jobs, not current, and roll into a new corporation that is set up by the plan administrator. Once there they go into a new 401K that has been created and is set up to be self-directed meaning you would invest in the business you are starting. In doing all of this the plan administrators are confident that you are not triggering a tax or penalty for using those funds and you can repay them into your retirement account with interest as your company grows and starts making money. When you repay those funds it will be without a set payment schedule and the interest goes to your retirement account.
- Home Equity Line of Credit – This approach was more commonly used at the peak of the real estate market. While still a viable option, lending in that space is still pretty tight and that sends most candidates back to SBA options.
- Loan Against Stock or Bond Portfolio – If you have a portfolio of stocks or bonds that you would like to use to fund your new business, you don’t have to sell them and cash out. Your financial advisor can often use the portfolio as collateral and get a loan put together, usually at a very low interest rate. The advantage may be that if your stocks are likely to increase in value or pay a dividend then you still own them.
- Equipment Leases – While this would not fund an entire business an equipment lease in operations like restaurants can be a good way to lower the portion of the business that needs to be financed via a traditional or SBA loan. Often when these are a good option the franchisor has vendors for their equipment or a separate leasing option already in place.
- Franchisor Programs – These include the Vetfran Program in which a number of franchisors offer benefits from a percentage discount on the franchise fee to waiving it all together and Minority incentive programs that offer a discount on franchsie fees with some franchisors. Inquire with the franchisor you are interested in, the International Franchise association or a franchise consultant. Some franchise companies also direct lend to all new owners for a portion of the startup costs.
- Friends and Family – Approach this option very carefully. If you are going to borrow from someone you know or bring them in as a partner in the business make sure everyone knows their roles, who makes which decisions, who does each job and that no matter what happens you will not let the business get in the way of your relationship. All of that said, we do see family members, friends and associates working together to get businesses off the ground.
These are some common approaches that are easy to investigate with your advisory team, for many of our candidates funding comes from a combination of sources. There may be other alternatives that could be brought to bear depending on the concept you are considering and your financial toolbox. As always, having a qualified guide can save you a lot of time, and sometimes money, in the process.
With the right game plan you may find that your dream to open single units over a number of years can actually be consolidated into a multi-unit franchise license purchase and more rapid growth towards your goals. The borrowing process often becomes much easier after you get a couple units open and when those first units can collateralize the loans on the next units.
Is it possible that the financial plan for your franchise dreams is just a few phone calls away?
Mr. Knauf is a highly sought after trusted advisor to many companies; Public, Independent and Franchised of all sizes and in many markets. His 20 plus years of experience in both start-up and mature business operations makes him uniquely qualified to advise individuals that have dreamed of going into business for themselves in order to gain more control, independence, time flexibility and to be able to earn in proportion to their real contribution.
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