UPDATED 1-28-2020: Many people dream of owning a business at one time or another but determining what products or services to offer can be difficult. Franchise businesses are an excellent option as these business ventures are already branded so that most customers are already familiar with the franchise and the product or service has been proven to meet customer demand.
Like any business venture, investing in a franchise requires funding to purchase the rights to operate as a franchise, lease equipment, secure inventory, grow the business and more. Not many people have the necessary amount of funds just lying around. Below we have gathered together the top 10 funding sources for securing the necessary capital you need to get on the road to success with your franchise dreams.
1: Franchisor Financing Options
For some reason, people do not think to ask the franchisor about financing and loan options, perhaps because they are afraid that showing the franchisor that they need to borrow money will set a bad example. But in reality, the franchisor should be at the very top of the list when seeking funding. Nearly every franchisor in the United States offers some form of debt financing. Also, many others may offer no principal loans, balloon payment options, finance some of the costs themselves or offer financing plans for leasing equipment and operational costs.
2: Conventional Banks And Credit Unions
The top advantage of going to a bank or credit union for funding is that they will see the benefits of working with an established franchise instead of an unknown start-up company. You'll need to get your credit in order and have a comprehensive business plan in place to have a shot at this route. So get all your financial paperwork in order. Also, if you can put some of your own money into the deal -- about 20% -- banks will look more favorably on you.
3: Small Business Administration
SBA loans are available for franchisees in most cases when certain criteria are met. SBA loans offer smaller down payments and longer repayment terms than conventional bank loans which is ideal for those just starting out with a new business venture. Going through the SBA can give you a bit more backing with the bank and reduce the risks that the lenders have to take on with this venture.
4: Business Partners
It might take two people to make your franchise dreams come true. Finding a business partner who will front you some of the money can be a ideal option. Yet you have to set some ground rules on who will operate the business, manage the employees and split the profits. Without having established plans in order can turn the partnership into a business nightmare. Another route is to find a venture capitalist or angel investor who is interested in your industry to provide the starting capital.
5: Home Equities
Using your home as collateral has become a go-to funding option for franchise ventures. You must ensure that your home has retained or raised in value to get the equity loan. Take the time to sit down and decide just how much money you will need. You don't want to put yourself into a financial situation where you can't pay back the loan as you end up losing your home.
6: Borrowing From Friends And Neighbors
If you want to avoid losing your home to the banks, or paying large interest rates on loans, you might want to try asking friends and family members for the funding. One of the top advantages to borrowing money through this route is that you can establish your own payment plans with family and friends that fits better into your personal finances. You can also have an easier time in amending the payment plan when your financial situation changes.
7: Retirement Plans
Borrowing funds from retirement plans can be done, but not without pitfalls. The IRS has tax penalties on what money you take out of plans like a 401K. You can avoid many of the IRS penalties by setting up a C-corporation and rolling over the money into a profit-sharing plan.
8: Stock Assets
Don't forget about that penny stock you invested in years ago on a lark that is paying you back big time now. Stocks, bonds and mutual funds can provide you with the money to finance the franchise or provide money toward a loan offered by a lender. Before you touch these assets, check to make sure they are not a part of an IRA profit-sharing plan or other qualified plan.
Just about everybody has joined into the crowdsourcing evolution to fund everything from charities or online gaming software. While it might sound weird to ask total strangers to give you money for your franchise, it is an alternative route to take if other funding options don't pan out for you.
10: International Franchise Organization
The International Franchise Organization (IFA) provides resources and programs so you can find the right franchise to take part in. The IFA also provides initiatives for woman, minorities and other individuals to get involved in franchising as they can find programs that may assist with funding.
(This article was written to provide general information about franchise funding options. Everyone's financial situation is unique, be sure to speak to your accountant or financial advisor before deciding which funding option is right for you.)