Many potential franchise owners have the drive, skills and ambition to run a successful franchise, but they lack one important factor: the money. Funding a franchise isn’t a cheap endeavor, but it is a long-term investment that hopefully turns a profit.
Are your worries about franchise financing holding you back from investment?
There are a number of options available for future franchise owners in search of financing. Explore these three common approaches to determine the best course of franchise financing for you.
When you think of financing a franchise, you probably default to the concept of taking out a loan. Small business loans are one of the most common ways franchise buyers generate funding for their business ventures.
Often, franchisees turn to the U.S. Small Business Administration, which is designed to nurture and aid small businesses nationwide. When you opt for the SBA as a financing option, they may guarantee up to 90% of a loan you take out from a lender.
The process is fairly simple, too. You submit a loan application to your lender, whether that be a bank or other third-party entity. Once they approve your application, it’s forwarded to the SBA for approval. You still make payments to the lender, like you normally would, but now the SBA has your back in case something goes wrong.
Why not finance your franchise with money that’s already yours? Retirement savings or 401(k) rollover plans are popular and safe options for franchise financing.
Of course, borrowing from retirement is an option that might be met with skepticism, but there are a couple of approaches that could be right for you. The first is simple: Borrow the funds directly from your retirement account. This is easy to do by contacting your plan administrator – but keep in mind, you’ll lose money in taxes and easy withdrawal penalties.
The other option – rollover funding – requires a few more steps, but you’ll avoid extra fees. By creating a C corporation and rolling your current 401(k) or IRA funds into it, you’ll be able to fund your franchise without incurring taxes or penalties for early withdrawals. There are companies that specialize in streamlining this process and keeping your franchise financing strategy in line with IRS regulations.
If you’re looking for a safe way to invest in a franchise, consider a partnership approach. With this option, you still own the franchise but you share the responsibility of funding and running the business.
If you have the drive to buy a franchise but are short on the funds required to get it up and running, finding a partnership may be the way to go. Whether you turn to a friend, family member, silent investor or venture capitalist, there are various benefits that come with a franchise partnership.
One major benefit is the shared financial responsibility. When someone else is splitting the cost with you, the risk of investment is lowered, and you’re not saddled with investing as much money upfront.
Another advantage is the fact that this approach brings different perspectives to the table. For example, you may have a background in sales while your partner has experience as a manager. Your franchise and employees benefit from the diverse skills you both offer.
Finally, you also benefit in terms of running the franchise operations. As a new franchise owner, you’ll be taking on a new responsibility every day. With a partner alongside you, you’re able to split tasks to help ensure that the opening and ongoing management of your business are both smooth and successful.
Learn more about which franchise financing option is best for you by scheduling a free consultation with one of our experts.