Financing your Franchise Purchase
After you've found the right franchise for you, you'll need to finance the required starting costs. Although there are many franchising financing options available, what will work the best for you depends on your personal circumstances.
One of the most common ways to fund a franchise purchase is through the franchisor. Some franchisors now offer assistance to new franchisees through third-party lenders or direct financing. Speak to the franchisor about financing options, even if you're planning to use a bank. The franchisor may offer you lower rates or better terms than a traditional lender.
Your family and friends may be another possible funding source. You'll receive better interest rates and repayment terms by using people you know instead of a traditional financing avenue. You will need to work out a written agreement with any family or friend you borrow from to buy your franchise.
Some franchisees use existing assets, such as a home, to fund a franchise purchase. You can borrow against your home's equity using a home equity mortgage or line of credit. With a home equity loan, you'll receive the amount you borrow upfront and make regular monthly payments. A line of credit works more like a credit card, with you borrowing money in increments up to the limit. You must be able to make the payments on the mortgage as set by your repayment agreement, or you may lose your home in foreclosure.
You may use your retirement savings, such as your 401(k), to finance your franchise. The Entrepreneur Rollover Stock Ownership Plan allows you to transfer money from retirement savings directly to a business and, it you are withdrawing from your retirement as an investment, you may avoid taxes and penalties.
The Guidant 401(k) plan is another option for retirement funds. You may rollover your current retirement money into a Guidant plan and use the money for your investment. Speak to a financial advisor if you need help accessing your retirement funds for your franchise investment.
The U.S. Small Business Administrator offers loans to businesses. If the franchise allows for independent operators, you may qualify for an SBA loan. Contact the SBA to learn about the loan program and rules.
You can try traditional lending through a bank, but it may be difficult to get the money you need. You will need good credit and a strong business plan at the minimum.
HOW TO INNOVATE AS A FRANCHISEE
One of the advantages of being a franchisee is that, in most cases, the franchisor assumes responsibility for marketing, product and process innovation. It can also be one of the downsides.
Calculating the Base or Minimum Rent for Franchise Tenants
If the landlord’s rent percentage increases seem small, remember that this amount will compound annually – you could well be paying far more than you expected over the course of your five or 10-year lease term. Can you justify this?