Knowing how you’re going to fund opening your new business is essential as you decide which franchise opportunities to pursue.
Fortunately, the current financial landscape has a multitude of options for franchisees to fund their businesses, and interest rates on lending for business owners are historically low. Currently, most SBA 7(a) loans are at a prime rate of 3.25 percent – making now an incredibly advantageous time to invest in a franchise business.
The World of Funding Options
Today, there are a variety of options for funding for business owners, ensuring that potential franchisees can still succeed in fulfilling their entrepreneurial dreams without having to worry about financial burdens.
From equity funding to self-funding, here are a few options to think about in our current financial landscape.
1. Debt Funding
Debt funding includes a range of options like credit cards, bank loans and home equity loans. Bank loans, like Small Business Association (SBA) loans, are guaranteed up to 90 percent by the SBA, and the process is relatively straight forward. Small businesses or franchisees simply need to submit a loan application and follow the process.
Other options like home equity loans are also helpful, but franchisees should be fully aware that the inability to repay the amount you finance puts your home at risk.
2. Asset-Backed Funding
Asset-backed funding includes options like equipment leasing and security-backed financing. Many times, franchisors may have financing plans and arrangements with leasing companies for equipment necessary to run the franchise. This can be a significant factor when seeking financing since equipment often makes up between 25 and 75 percent of a franchise’s total start-up cost. If a franchise does not offer equipment leasing to its franchisees, there are non-franchise and non-bank companies that specialize in equipment leasing to franchisees.
Another option under asset-backed funding is through assets, stocks, bonds and mutual funds to secure a loan. However, it’s imperative to note that they cannot be attached to a qualified plan, like IRA profit-sharing plans.
Self-funding is through personal cash savings and/or a 401(k) or IRA investment plan. Depending on the age of the franchisee, those over age 59 can use their IRA to fund part of their financing requirements. However, taxes are required to be paid on the amounts used.
For those under age 59, there is the potential to take Substantial Equal Periodic Payments over the spread of at least five years and can cancel out the ten percent early withdrawal penalty.
4. Equity Funding
Last but not least, equity funding includes examples like angel investors or venture capital. Angel investors could be friends and family who believe in your dreams or people who see the potential in you and your business.
Many times, angel investors come in at the initial moments where most investors wouldn’t be interested. They’re typically individuals who have the cash to spare, but are also looking for a higher return on their investment – usually at least 25 percent. An angel investor is a great way to bridge the gap between family and friends and venture capital. However, make sure to clearly communicate your terms with said investor so expectations can be met.
While these are only some of the options out there for funding of new franchisees, it’s always important to research the concept that aligns with your budget and lifestyle. The most common source of starting up a business is through friends and family – don’t be afraid to ask for support. Be open and transparent with your lenders, have explanations and reasoning for your business decisions and keep them in the loop with successes and challenges. And most of all, don’t give up.
Looking to join a franchise that will help you devise a comprehensive business plan that will assist you in obtaining the right financing for your business? Contact us today!