Franchise Finance: Here Are the Most Common Ways to Do It

This month, FranNet is going to be taking an in-depth look at one of the most critical aspects of franchising. How to pay for it. According to a good many of our consultants, this is a key topic among the first visits with our clients. Our aim is to demystify the process and show you the many avenues available to you when it comes to funding your dream. That of becoming your own boss. At the same time, be realistic about your plan. Because financing will play an immense part in your decisions.

Personal Savings

Some, but definitely not all, candidates come to us with a nest egg consisting of their own finance option. Self-finance is a great gig, if you can get it, but it doesn’t represent the majority of prospective franchisees. Keep in mind that franchises come in all shapes, sizes, and investment levels. Depending on the value of the franchise concept you choose, it may not match what you have in the bank. But nest eggs of capital saved over the course of a career put you on pretty solid ground for financial negotiations.

The Franchise Financers

There are several finance companies who work exclusively with funding new franchisees. These folks are true experts because franchise funding is what they do best. 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. Keep in mind that some franchise brands deal exclusively with franchise financiers. And some franchise funders only work in certain industries. Your FranNet consultant can help you sort out brands and funding matches.

Franchisors

Much like the GM Financial funding option for automobiles, 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).

Traditional Banks

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 and more established 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. You need to know 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.

ROBS 401k Rollover

A ROBS 401k rollover provides you access to your retirement funds to use in your franchise purchase without having to cash out or borrow against it. It can be utilized to fund a new franchise or buy an existing one. When you activate the ROBS option, your retirement account will, in effect, owns shares of your new franchise. It is extremely advisable to seek professional counsel (both legal and/or accounting) to pursue this option, as using this finance tactic requires a set process of certain rules which must be followed precisely.

These are examples of basic franchise finance 101. Pick one and let’s get started!

Let’s chat! There’s a local FranNet consultant right in your market who knows that market inside and out – knows the personality of the market – knows the competitive landscape. FranNet has a great track record of assisting individuals on their path to entrepreneurship, and one of our franchise experts would love to provide you with guidance free of charge. Sound like something you might be interested in? Get started here and find your local consultant right now!

 

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