Are you eager to break free from the typical 9-to-5 routine and become your own boss? Do you dream of joining the ranks of over 700,000 successful franchise owners? If you’ve done your due diligence and are ready to take the plunge into business ownership, what’s holding you back? For many aspiring entrepreneurs, the biggest obstacle is funding.
Though buying a franchise is often less costly than starting a business from scratch, there are still numerous expenses, from initial franchise fees to ongoing costs like insurance premiums, inventory, and equipment. These expenses can quickly add up, making it impossible for the average person to pay upfront from their own bank account.
But fear not, there are financing options available that can ease the financial burden of purchasing a franchise. Better yet, many of these options come with low interest rates and favorable repayment terms, making franchise ownership more accessible than you might think. In this article, we’ll explore seven ways to buy a franchise even when you feel like you don’t have the necessary funds.
One of the most enticing advantages of buying a franchise is that franchisors in various industries often offer financing options to new and existing franchisees. Franchisor financing benefits both parties involved: the franchisee secures much-needed capital while the franchise continues to grow.
The specific amount and type of financing offered vary from franchise to franchise. For example, Weed Man provides up to $40,000 to franchisees who may not qualify for a bank loan. The UPS Store offers a low-interest financing program for qualified borrowers. Marco’s Pizza assists franchisees in finding funding through sources like traditional and SBA loans.
Like any other type of financing, qualification requirements apply. Franchisors expect franchisees to have some funds to invest and meet certain credit criteria.
If you desire long repayment terms and low interest rates, a conventional loan might be suitable. However, qualifying for such a loan as a new business owner can be challenging. Fortunately, the Small Business Administration (SBA) makes it easier for franchisees and other small business owners to obtain loans with competitive rates and terms.
The SBA guarantees loans provided by banks, credit unions, and other lenders known as intermediaries. This guarantee makes it more likely for franchisees to be approved.
The SBA offers several types of loans for franchisees, with one of the best options being the SBA 7(a) loan. With this loan, you can receive up to $5 million, and repayment terms range from 7 to 25 years. The funds can be used for various purposes, including franchise fees, commercial real estate, equipment, and startup costs. Interest rates are highly competitive and depend on the loan amount and duration.
Another SBA loan option is the CDC/504 loan. Under this program, a nonprofit Certified Development Company (CDC) provides up to 40% of the required amount, while a traditional lender covers up to 50%. With as little as a 10% contribution, you can secure the funding you need. CDC/504 funds are typically used to purchase or update commercial real estate or buy equipment for the franchise.
While qualifying for an SBA loan is generally easier than obtaining a conventional loan, the process can be time-consuming. Approval and funding can take weeks to months, and you must meet various requirements, including having a solid personal credit score and meeting the SBA’s definition of a small business. Additionally, be prepared to pay any fees required by the lender.
Home Equity Loans & HELOCs
If you own a home, you have the option to use your equity as collateral for a startup loan. Equity refers to the difference between your property’s value and the remaining mortgage balance. For ex ample, if your home is appraised at $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity that you can potentially leverage for your business.
With a home equity loan, lenders typically allow you to borrow up to 80% of the home’s value, minus the remaining mortgage. These funds can be used for various purposes, including startup costs and franchise fees.
Another option is a home equity line of credit (HELOC), which provides you with a flexible line of credit backed by your home’s equity. You can withdraw funds as needed up to a set credit limit during the draw period, typically around one year. Afterward, you enter the repayment period. HELOCs offer competitive interest rates, long repayment terms, and flexibility in fund usage. However, be aware that defaulting on the loan could put your personal property at risk.
Apart from having home equity, you must meet other lender requirements, such as a good credit score, a low debt-to-income ratio, and a solid repayment history.
Rollovers as Business Startups (ROBS)
Using funds from your retirement account is another viable option for financing your franchise purchase. While withdrawing from your retirement account early typically incurs penalties, you can avoid these penalties and gain quick access to your funds by utilizing a Rollovers for Business Startups plan (ROBS).
With a ROBS plan, you can use your own retirement funds to start your business. This involves establishing a new C-corporation and a new retirement fund. The existing retirement account’s funds are rolled over into the new retirement account, which is then used to purchase stock in the C-corporation, providing the necessary cash to launch your business.
Qualifying for a ROBS plan is straightforward; you need a qualifying retirement account, such as a 401(k), 403(b), or IRA. Unlike other types of funding, there are no credit score or income requirements since this isn’t a loan. However, be aware that if your business fails, you risk losing your retirement funds.
While you won’t pay interest to a lender or face penalties for early withdrawal, you’ll still need to work with a ROBS provider to set up your C-corporation and retirement account. Setup and maintenance fees may apply.
The internet has revolutionized the loan shopping experience, making it easy to find financing options for purchasing a franchise. However, as a startup, securing a competitive business loan can be challenging. Lenders evaluate risk based on factors like your personal and business credit profiles, annual revenues, and time in business. If your business hasn’t launched yet or is still in its early stages, finding funds with favorable rates and terms can be difficult.
One viable option is to take out a personal loan for business purposes. When you apply, you use your personal information — such as your personal credit score, history, and annual income — to qualify for funding. Once approved, this loan can be used to purchase your franchise or cover other startup costs.
If you lack the funds to buy a franchise outright, consider forming a partnership. Find someone willing to invest in the business, be it a friend, family member, or colleague. However, keep in mind that forming a partnership means sharing ownership, decision-making authority, and profits.
When forming a partnership, consult an attorney to draft the necessary agreements and documents. Proper documentation protects both partners and ensures compliance with Securities and Exchange Commission regulations.
If you have some savings or another source of funding, explore lower-cost franchising opportunities. Established franchises like McDonald’s and Chick-fil-A tend to have higher purchase and operating costs. Instead, focus on more affordable opportunities that allow you to enter the world of business ownership.
Additionally, look for franchises that offer discounts to new owners. Some franchisors provide discounts on franchise fees for women, minorities, and military service members or veterans. You can begin researching low-cost franchises by checking out our recommended options.
Although funding a franchise purchase can be challenging, it’s far from impossible. As shown by the methods highlighted above, affordable financing options do exist. The key is to thoroughly research your options, get creative with funding sources if necessary, and select the option that best suits your long-term business goals.
To learn more about franchise financing and start your own business, visit Garrity Traina.