Once a client has had an initial conversation with a Franchisor, they are most likely to ask the following questions: “How much is this going to cost and what funding options are available?
Before "diving" into these questions, one of our Franchise Consultants will review Item 7, in the Franchise Disclosure Document, (FDD), and confirm all the costs associated with the investment. Since this Item has a range of low-to-high costs, we advise our clients take a prudent approach and plan on the higher investment number. To begin the funding process, listed below are several options to consider:
Franchisor Funding: Several franchisors offer favorable in-house monies for qualified candidates. Typically, a Franchisor may offer reasonable rates, spread over seveal years, so that the candidate doesn't have to worry about the payback in the early years of their business.
Home Equity Line of Credit/or Refinance Your Home: This is the least expensive form of money, however, banks only account for 80% of your loan(s) to the value you of your home. Due to most property values depreciating, in the last several years, it is difficult to secure this type funding for most clients.
401K Rollover Options: Almost 95% of our clients use this technique, which allows the client to fund their franchise costs, using their 401K or IRA. No tax penalties are associated, using this strategy, and many clients are not aware of all the benefits.
SBA Microloan: Most of the funds have “dried up” due to all the cuts in Washington. However, you may still be eligible for a small loan if you are a Veteran.
Unsecured business credit cards: Depending on your credit score, you may be able to receive as high as $80K in unsecured business credit cards, however, this form of money can be very costly. You may want to carefully evaluate this option, as it may help you get started in your enterprise in a shorter time frame.
Despite what you have heard in the marketplace, there are no other sources of funding available for start-ups, due the tightening of credit from most banks. You may get fortunate and have your local bank extend you credit, however, you will typically have to lien a piece of real estate/or other asset, (a 401K is not considered an asset). This strategy is not very effective because your business growth will be contingent on the amount of your assets you own.
We recommend using the following strategies to properly capitalize your franchise:
*Review Item 7, (Total Investment), and plan on spending the higher number listed in the document
*Subtract the cash you have from your investments, including a 401K and other liquid assets.
*Add in at least 6 months of household living expenses, if this is your sole source of income.
*Then confirm with the Franchise Consultant how much you need to borrow and they will introduce you to the proper funders.
If you don’t have these figures outlined in writing, it will be very difficult to make an accurate capital outlay. Additionally, most franchisors will confirm your assets at Discovery Day, requesting that you provide bank statements, stock investments and cash, so you will need to be prepared ahead of time.
Funding a franchise involves using a variety of creative funding strategies. Our franchise consultants are experts in funding a franchise. Buying a business is a complicated investment. Don’t allow for any error, especially funding your franchise properly.
Call us today, 866-288-9404, and we will discuss all the different strategies with you in greater detail.
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