How to Fund Your Franchise Dream

It’s the simple truth: a franchise is a big purchase. The cost is often similar to (or even more than) buying a home, and for good reason. When you buy a franchise, you buy a business system that has already been tested and refined for success. You don’t have to worry about burning through your cash while you figure out product-market fit, operational efficiencies, and other details that often sink traditional business ventures. But this does mean that franchising usually involves more up-front cost than starting a traditional business. As a result, you’ll need a plan for how to fund your franchise dream.

Why a Funding Strategy Is Important

If you were a franchisor, which franchisee would you choose: the one who has their funding lined up and ready to go, or the one who’s still not sure how they’re going to pay their startup costs? You’d choose the first person, of course. It’s a basic rule of business: liquidity wins. And that’s why it’s so important to have a funding strategy before you start the process of applying to a franchisor.

Early in your franchise research process, you should know the answers to the following questions:

• What’s my personal balance sheet? How much cash do I have on hand to fund franchise startup costs?
• Am I willing and able to borrow money to help fund my startup costs?
• How will I pay my bills until I can draw a salary from my business?

Franchisors will want to see your financials as part of the awarding process, to satisfy themselves that you can pay your startup costs and maintain the business until it’s profitable. If you intend to obtain financing for startup costs, franchisors will also want to know that you’ve already qualified for a loan or can easily do so. And they’ll want you to have a solid strategy for paying your bills in the early days, since personal financial strain can lead a franchisee to throw in the towel.

If you work with the Empowered Franchisee team, you’ll complete a formal self-assessment to help you think about funding. We’ll also connect you with a funding specialist early in the game, to help finalize your financial details. This helps ensure that you’ll be competitive against other applicants during the franchisor’s awarding process. Keep reading to learn more about the types of options your funding specialist might suggest.

Funding Options for Your Franchise

Cash

If you have a very healthy balance sheet, you may be able to pay cash for your franchise startup costs. Or you might use cash for part of your startup costs and obtain financing for the rest. Cash funding usually comes from a source such as an inheritance, personal stock portfolio, or the sale of a major asset (e.g., a vacation home).

While cash has the advantage of allowing you to start your business with less debt, you shouldn’t use up your entire nest egg to buy a franchise. It’s very important to keep a financial cushion for both personal and business emergencies. Plus, most candidates use financing as part of their funding strategy, so franchisors don’t necessarily downgrade a candidate because of it.

Retirement funds

You may want to pay all or part of your franchise startup costs using a loan from your retirement account. A 401(k) loan is the most common arrangement, but other types of retirement accounts allow loans, too. Keep in mind that these types of loans are often subject to special requirements. For instance, loan amounts are usually limited to $50,000. And if you take a loan from a 401(k), you’ll have to repay it more quickly if you leave your day job. That means this option is best if you intend to operate your franchise as a side hustle.

Another popular retirement-based financing option is the Rollover For Business Startup (ROBS) program, which allows you to convert your retirement funds into an investment in your new business. This strategy is not a loan and may enable you to eliminate or reduce the need for additional funding. As a result, it can enable you to start your business debt-free, without loan payments that increase your overhead. Since this option reduces your total retirement nest egg, it may work best for situations where your franchise is part of your retirement plan.

A funding specialist or your financial advisor can help you determine whether either of these options is right for you.

SBA loans

Nearly half the U.S. workforce is employed by small businesses. The Small Business Administration (SBA) is a federal agency that exists to support this vital sector of our economy, including franchises.

Among other resources, the SBA offers loan programs for small-business owners. Four types of SBA loans are especially relevant to potential franchisees:

• Standard 7(a) loans. These loans can be for up to $5 million and require eligibility determination by the SBA. Turnaround time on a decision is usually 5-10 business days.
• Small 7(a)/Express loans. These loans have similar terms to standard 7(a) loans. While they technically have a maximum loan amount of $350,000, most banks limit these loans to no more than $150,000.
• 504 loans. These loans can be for up to $5 million. They must be used specifically to purchase or build “major fixed assets” such as facilities or equipment, so they are most applicable to brick-and-mortar franchises.

A funding specialist can help you determine which, if any, of these loans might be a good fit for your franchise funding strategy.

HELOC

A home equity line of credit, popularly referred to as a HELOC, borrows against the equity in your primary residence. HELOCs often have comparatively low interest rates and flexible repayment terms, and the interest is sometimes tax-deductible. In addition, because they are a line of credit, you borrow money only as you need it. This can help you keep your debt low.

On the flip side, HELOCs use your home as collateral, and the interest rate is usually variable, not fixed. Because they function somewhat like credit cards, with small minimum payments and a loan amount that piles up over time, they also work best for borrowers with strong financial discipline.

Other financing

Retirement loans, SBA loans, and HELOCs are the most popular options for franchise financing, but they are not the only choices. If these options don’t sound appealing to you, but you still need some kind of outside funding for your franchise, consider the following:

• Franchisor financing. Some franchisors offer financing, either directly or through partnerships with third-parties. They may waive fees for loans from specific lenders or offer better interest rates or repayment terms than you could obtain through a private loan from a bank. However, always compare terms carefully to make sure you’re getting the best deal.
• Private loans. In certain circumstances, you may need or prefer to go directly to a bank for a private loan. Private loans are likely to have less favorable terms than a specialized loan, such as one from the SBA, but they may be more flexible and allow for on-the-spot approval. Especially if you just want to borrow a small amount of money for a short time, you might prefer this path.
• Unsecured Loans. Unsecured loans don’t require collateral and are made on the basis of your income, credit-worthiness, and spending patterns. While some people prefer these loans because they don’t put other assets (such as a home) at risk, they usually charge higher interest rates and fees than secured loans. They also typically involve an approval turnaround of 3-4 weeks, so plan your timeline accordingly.
• Business grants. Various federal and private entities offer grants to help people start small businesses. Grants tend to be on the small side, so they usually work best as a supplement to other forms of funding. They are most often available for businesses in niche industries, in economically distressed areas, or for underrepresented groups of business owners (e.g., veterans or women).

Regardless of the option you choose, one rule of thumb applies across the board: when you’re thinking about how to fund your franchise dream, make sure you investigate your options early. The sooner you can nail down your financial situation, the stronger your position will be. And if you need some help understanding your options? Book some time with me or Lauri, and we can start the conversation about what kind of franchise funding is best for you and your family.