If you’re finally considering crossing over onto the path of becoming your own boss, you aren’t alone if you’re worried about how you’re going to pay for the privilege. While there are over 3,000 different franchise concepts to choose from, financing a brand of your choice will require decisions. And decisions require information. So where is the money going to come from? Let’s look at a few of the most common avenues of franchise financing:
The Nest Egg
Not everybody enjoys a career spanning several decades, socking away money for the chance to spring into a business of their own. But for a few people, this is a carefully planned exercise. Depending on the value of the franchise concept you choose, it could cost a pretty penny. But nest eggs of capital saved over the course of a career put you on pretty solid ground for financial negotiations.
Some franchisors offer their qualified candidates an avenue to financing a new location. Some even go so far as to help finance new franchises by waiving certain initial startup fees or royalty payments. Keep in mind that if a specific franchisor does offer this option, you should be able to locate the terms in Section 10 of your Franchise Disclosure Document (FDD).
The Franchise Financers
There are several finance companies who work exclusively with funding new franchisees. These folks are true experts because franchise funding is all they do. They can work with individuals to determine the best route to take and they have plenty of previous experience. Their ultimate aim is to match borrowers with lenders or lend directly. Some franchise brands deal exclusively with franchise financiers. And some franchise funders only work in certain industries.
Banks and yes, even credit unions, are a good place to start when inquiring about the funding necessary to finance a franchise of your own. If nothing else, it should serve as a good yardstick measurement of what rate and terms you can expect to be offered. And you’ll then be able to compare them to your other options. Keep in mind that traditional banks do tend to skew approvals towards less risky franchise concepts.
Small Business Administration (SBA)
SBA loans, specifically the 7(a) program, have become a popular option for financing franchises. The SBA is well skilled in advising and navigating entrepreneurs through the process, as franchising and small business loans are a common exercise for them. Keep in mind that you aren’t borrowing directly from the SBA, but rather a network of banks and credit unions who have been approved by them to do business.
The 401k Rollover option is a simple enough process, but still requires a nominal amount of legal help. To qualify for this option, you must have a healthy retirement account to begin with. By utilizing the 401k option, an individual can use funds from their eligible retirement account to buy a franchise without taking a tax penalty. This option can be an attractive one because you’ll be essentially starting your business debt-free. If you’d like to look into this option, there are franchise finance companies who specialize in this technique, but it’s very advisable to seek the advice of legal and accounting counsel before proceeding.
As one can see, when it comes to financing a franchise of your own, you have many avenues from which to choose. Finding out which option works best for your personal situation is tantamount to getting the best rates and terms possible. Don’t take this step lightly, as the very profitability of your future as a franchise owner is at stake.
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