5 ways to finance a franchise
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Franchises come in all shapes, sizes and levels of financial commitment. Finding a franchise ownership opportunity that’s right for you is the most important factor, followed closely by payment. How will you obtain the necessary funds to cover the initial franchise fees, start-up costs, and subsequent royalty payments? Luckily, there are several ways to get financing for your dream franchise so you can finally become your own boss.
To give you a range of financing choices, here are five ways to finance a franchise.
1. Apply for a 7(a) with the SBA
The US Small Business Administration offers one of the most popular financing options for buying a franchise: SBA 7(a). You need to understand that the SBA does not originate the loan itself, rather it partners with banks and other lending institutions to guarantee one. SBA 7(a) loans can be up to $5 million and repayment terms are typically 10 years. If you intend to go this route, be sure to explore an SBA lender who understands your franchise industry. The application process for SBA 7(a) loans is notoriously thorough, so make sure you have all of your documents in good order.
Related: Are you starting a franchise but need financing? Here’s what to do.
2. Your personal bank
Banks and credit unions are always open to loan applications for franchisees and I hope you are on the first name basis of your lending institution. Depending on your banking (and repayment) history, you may be able to qualify for favorable terms on the amount and interest rate. Banks tend to like the nature of franchises, especially their proven business models. To give yourself the best shot, do your homework. Have your business plan and pro forma ready to roll, then see where the chips fall.
3. Your franchisor
Many franchises offer their own financing options when welcoming a new member to the family. If you decide to go this route, at least you know how well your lender understands the business model and its ability to generate revenue. If nothing else, the loan amount should be fairly specific. If your particular franchise offers its own financing, you will learn more about it in the Franchise Disclosure Document (FDD). Go directly to point 10 to find out.
Related: Franchisors offer their own financing programs
4. Alternative lenders
Banks and credit unions aren’t the only players in town when it comes to securing the financing needed to buy the franchise of your dreams. There are many alternative loan options to consider, some of which specialize in financing franchises. Guidant Financial and ApplePie Capital are two examples that work with many franchisors. Update your credit score and find out what they offer. Then you can compare their terms with your own alternative lenders.
It seems a little odd that a financing option goes by the acronym ROBS, but this method of financing is becoming an increasingly popular option for buying a franchise. It stands for Rollovers for Business Start-Ups and it’s a plan where you can take money out of your personal 401K (or similar tax-advantaged retirement account) to fund the purchase of a franchise or small business. . Under normal circumstances, a pre-retirement withdrawal from your 401K would cost you a pretty penny in penalties, but the beauty of the ROBS option is that you won’t in this case. Borrowing from your 401K is always a risk, so it’s best to seek the advice of a professional CPA or your financial planner before pulling the trigger on this option.
Related: Should you tap your 401(k) to start your business?
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