How does funding for a franchise work?

How does funding for a franchise work

Buying a franchise is often easier than starting a new business from the ground up.  You get to take advantage of brand recognition and marketing that is already in place.  But in order to buy your franchise and turn it into something successful, you need money.  If you don’t have any or all of the cash then how does funding for a franchise work? Here is some information to get the financing that you need.

Here is the personal information you will need before you start looking for funding:

  1. Preparing a personal financial statement for yourself and other colleagues who are joining you in your venture.
  2. On completion of the statement, consider looking at the asset side by calculating the available funds.
  3. Determine your personal level of risk and the amount of resources that you are ready to invest in your franchise.
  4. Generating a strategic plan for your business.

Methods of financing a franchise

Conventional loans

Conventional loans, in most cases, are limited to established business owners looking to expand, or you have owned a thriving business in the past. Also, the lenders are usually seeking collateral in the form real estate which they can place a lien to alleviate their risk. The terms regarding conventional loans normally run for 5 to 10 years.

Cash

The benefit of purchasing a franchise using your own money will promote a debt-free business. Cash, on the other hand is not an ideal solution if you don’t have enough for operating costs as well.  You will need to keep cash reserves for the day to day running of any kind of business.

Leasing

Suppose your franchise requires hard equipment or assets including office machinery, vehicles, among others, then you may consider leasing. The terms and rates usually vary considerably; therefore, you should conduct a research based on your needs and the ultimate way to finance it.

Self-directed retirement plans

401k or IRA can act as your best franchise partner.  Often you can borrow from a 401k or IRA for very specific purposes without facing a tax penalty.  The money will need to be repaid within a certain time or you can be penalized.  Discuss this option with your accountant first before you start pulling money out.

Online loan portals

There are websites that will connect you to the lenders when looking for financing for your franchise. These sites have varying fees and levels of service; hence you should consider the risks and terms before you sign on the dotted line.  Here is a video on how you can use peer lending to secure financing.

Direct franchisor financing

A number of franchisors do provide financing. In the event financing is possible, make certain that you look at the terms carefully

SBA loans

SBA loans are outlined to reduce a lender’s risk by providing a warranty on the principal of the loan offered by the federal government. Suppose a real estate is taken into account, the government, as a matter of fact, funds a part of the loan directly. SBA loans are usually complicated to apply for, hence require personal mortgages and liens to be put on your properties. Therefore, you should consider getting help from a professional when applying for this type of loan.

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