Often, especially in the last 5 years, a large portion of franchise purchases were financed with home equity. Today, with housing prices taking a tumble across the country, the situation has changed dramatically. Even in these challenging economic times it is still very much possible to finance your franchise purchase. The most important thing is to be prepared and to have a strong desire to run your own business.
In general, potential franchise owners need to be aware of their current financial situation, have a prepared balance sheet, know their credit score and upon finding the right franchise, invest time into working on their business plan.
Something else to consider, franchisers often look at several financial criteria when evaluating prospective candidates. The terms that come into play are Liquid Capital, Total Amount of Investment and Overall Net Worth. Each company's requirements are different. Here is the overview of the main financing options available to you:
1. Commercial Bank Loan
A way to finance your business is to take out a bank loan for part of the cost. To qualify for a bank loan, you will need sufficient personal collateral to secure the loan. Many franchisors have relationships with lending institutions and will assist their franchisees in obtaining these loans.
2. Franchisor
Also, there are some franchise companies who will loan money to their franchisees for a franchise purchase, often at a low interest rate. In this case the franchisor is giving you a "double seal of approval," once as a franchisee and again as a borrower!
3. Grants
grantsforwomen.org or grants.gov are great resources to get started in searching for grants. These don't work for everyone and it does take a while to go through the process, but with some persistence, they may be well worth your time.
4. 401(K) or IRA
A popular trend for financing a new business is to take out a loan from a retirement account. If you have an IRA, 401K or other retirement account, you may be able to use that money to invest in a franchise. Essentially you are loaning that money to yourself and saving the interest you would pay to borrow money from an outside party. If your business becomes profitable, your retirement account will also increase. A financial advisor is needed to set this up so you can do this without taking a taxable distribution or incurring penalties.
5. SBA loan
The United States Government is also a resource when looking for money to fund a business. The Small Business Administration (SBA) has programs available to help you with your franchise purchase. While the SBA does not loan you the money, they will be a guarantor of loans made by private and other institutions. This type of loan is popular with first-time franchisees that do not have a track record of running a business.
A solid business plan and great credit history are important for anyone securing any type of loan. Lenders will scrutinize your credit history to determine if you have experience borrowing money and making payments on time. To be approved for a loan, the franchisor you intend to join should have a strong model, a proven concept and a history of success. Majority of franchises I work with are "SBA approved" which greatly expedites the process. You will also have to pay for part of the purchase in cash, as a down payment, showing that you have some "skin in the game," and will be willing to work hard to protect your personal investment. There are of various SBA lenders out there, from local banks, to the one that specialize in franchising and even, in specific franchisors.
6. Friends and Family
If you have friends or relatives with money, you may be able to borrow from them, particularly if they have confidence in your entrepreneurial abilities. Private loans are often provided at low interest rates which can be helpful when you are getting started. You may also want