As you enter this phase of capitalization, keep in mind that there are lenders, accountants and attorneys who specialize in franchise financing. In some cases, they represent your best chance of a smooth, successful financing experience.
I recommend starting your financing investigations by weighing your ability and willingness to leverage your own assets and working your way from there to conventional and other potential lending sources.
Home Equity
If you are a homeowner, you may be able to leverage your home equity through a home equity line of credit (HELOC), or a home equity loan (HEL). The biggest advantage to this is that leveraging your own existing equity should be possible at a relatively low interest rate. The disadvantage is the inherent risk involved in putting your home up as collateral for your business. Always take care not to assume more risk than you could handle.
Retirement Funds
You can leverage retirement funds for your business investment and avoid penalties by working with a company that specializes in helping investors take advantage of the Entrepreneur Rollover Stock Ownership Plan (ERSOP) or Rollovers as Business Startups plan (ROBS) to fund new businesses. In these scenarios, your retirement funds become an investor in your business instead of being invested in publicly traded equities or fixed-income investments. Using this kind of account is quite complicated, so make sure you work with a reputable investment professional to ensure your ERSOP or ROBS is set up and executed correctly. As with the use of home equity funds, use caution as you look at utilizing retirement dollars. Know the risks of putting this money ear-marked for long-term security on the line for a business venture.
Family and Friends
Gifts, loans, and investments from family members can be a great source of capital for your business. I worked with one candidate who ended up recruiting both his father and brother in his investment, and they successfully launched multiple units of a franchise they all hope to profit from for some time to come. If you do accept funds from people you have personal relationships with, make sure you have an agreement in writing, with the terms and conditions of the gift, investment or loan clearly outlined—including investment terms, payback terms, interest, and what happens if you default. Having the details hammered out in an agreement may prevent a misunderstanding down the line.
Franchisor (or franchisor-assisted) Financing
Franchisor financing is sometimes offered directly from a franchisor and sometimes offered through a third party prearranged by the franchisor. Programs vary widely, but some of these arrangements have notable benefits. For example, some may not require collateral, some might offer equipment leasing, some offer deferred payments. Some may have low-interest rates, but others may not even be competitive with traditional loans. Check with your franchisor to see what programs it may offer, then be sure to compare all the choices available to you.
Franchise Financing Companies
There are companies that specialize in financing franchise businesses that can offer assistance with figuring out how to capitalize yours. These companies understand the franchise business model and have relationships with financial institutions that fund franchise loans. Some also specialize in assisting clients with utilizing retirement funds as ROBS (Rollovers as Business Startups plans) and in securing U.S. Small Business Administration loans. In many cases, these companies have pre-approved dollars set aside to help people invest in franchised businesses. This can streamline the process of getting your investment dollars.
Traditional Loans
Another option is to leverage traditional business loans, or commercial loans. There are many types of commercial lending, including secured and unsecured loans, short- and long-term loans, equipment loans, and business lines of credit. Expect to put up at least 20% of your investment to be considered for these kinds of loans, and know that many traditional lenders may not understand the franchise business model as well as lenders who specialize in this area. As with any financing source, it’s always in your best interest to shop around, so make sure you check out business loans at multiple financial institutions.
US Small Business Administration Loans
The SBA offers loans through participating banks and lenders, and since the SBA will guarantee up to 85% of the loan, there is less risk for the lender—which can translate to a lower interest rate for you. SBA financing is not really a government loan, but rather a private loan backed by government funds. There are multiple types of SBA loans you can investigate. Make sure you carefully evaluate the pros and cons associated with taking out an SBA versus a traditional loan, i.e. the cost to establish the loan, the length of the loan, and the interest rates of the loan. Note that if your franchise company is listed on the SBA registry, it may help expedite the process for a new franchisee to get an SBA loan. Also worth noting is the fact that individuals with high net worth may not qualify for this type of loan.
Online Financing Centers
There are online companies that serve as clearinghouses for franchise financing. These companies have multiple financial institutions in their systems to review your financial information and evaluate your request for financing. They host the equivalent of speed dating for the loan industry—you provide all of your information, then lenders review it and decide if they’d like to initiate a relationship with you. As with any lender, the onus is on you to make sure the franchising company and lender are reputable entities. Your franchise consultant can recommend an online franchise financing company with a good reputation and track record.
