Some franchise buyers are eager to invest in opening a location and starting their business but don’t have the personal cash flow to pay the franchise fees upfront. If you don’t have the money on hand to fund your franchise, there are a number of lending options that may fit your needs, without delaying the buying process.
Types Of Franchise Loans For Potential Business Owners
With each franchise funding option comes its own set of benefits and setbacks. It’s important to have a full understanding of the different loan types before you determine which one best suits your needs as a franchise buyer.
When people are looking for loans, the first place they usually turn to is the bank. Whether you’re getting a loan for a car, a home or a franchise location, banks are the most conventional place to start seeking financing options.
The greatest concern for banks as they consider your viability for financing is your credit score. If you’re worried that less-than-perfect credit or existing debt may deter the bank from giving you a loan, you may want to seek another option.
Small Business Administration loans are designed specifically to fund potential business owners like you. This means they cater directly to many of your needs. SBA loans are backed by the federal government, making them a low-risk borrowing option. In an effort to encourage small business growth, the government guarantees loans received from banks or qualified lenders against default.
Nearly 10% of all SBA loans go to franchise buyers. Because these loans range in value from $250,000 to $2 million, they pose a valid option for gaining franchise financing upfront. One drawback to SBA loans is that they have fluctuating interest rates usually negotiated by the bank and the SBA, which means you need to muster enough business to cover interest rates when they rise.
Sometimes, the best person to borrow from is yourself. Many franchise owners choose to tap into their 401(k) or retirement funds to amass the funds they need to finance their franchise. There are two ways to use your 401(k) to fund your franchise: taking out a loan that you’d have to pay taxes on or adopting the rollover method.
To rollover your 401(k) funds, you have to first create a C corporation. You then transfer your funds to the C corporation, which becomes the owner of your business, thereby avoiding taxes. There are companies that specialize in rollover funding, and it’s often prudent to trust experts to guide you through the process.
Regardless of the funding option you decide to pursue, it’s always a good idea to consult your franchisor. They’ll have insight into which avenues are best suited for funding their franchise.
Don’t let a lack of cash flow hold you back from your goal of becoming a franchise owner. Put the time and effort into seeking out the right funding for your needs.
Find out more about franchise funding and the opportunities available to you by connecting with a franchise expert.