If you want to purchase a franchise business but aren’t sure how you’ll come up with enough money, here we’ll cover four business financing options that you might want to consider.
Of course, you’ll need to think about your specific situation, your current financial assets and creditworthiness, and the cost of the franchise system that you want to purchase to determine if any of these options are right for you.
One thing that you can do right off the bat, especially if your funds are limited, is to shop for a franchise brand that’s more affordable when compared to other brands. Franchise Business Review’s 2019 Top Low Cost Franchises list is a great place to start. This list includes franchise brands with high franchisee satisfaction ratings that you can purchase with an initial investment under $100,000. MaidPro tops the list in the Cleaning & Maintenance category.
Here are the four options that are worth considering when you need help financing your franchise.
1-Cash & Other Savings
Over half of the entrepreneurs who purchase MaidPro franchises use cash and savings to cover their start-up investments. Some sell a few stocks or liquidate CDs, while others get help from family members and friends. This is the simplest source for your initial franchise investment, and lets you purchase your own business without having to borrow money from a bank or other financial institution.
2-Convert Retirement Funds
Who better invest to in your business than you? If you have savings set aside for retirement, you might want to consider tapping into those funds to finance your franchise purchase. The primary advantage is that you don’t have to start your business in debt. And the good news is that you might be able to borrow from yourself without having to pay any taxes or penalties. Typically, if you withdraw money out of an IRA or 401k before your turn 59-½ years old, you must pay taxes on the money plus a 10 percent early withdrawal penalty. Two better options are to either take out a 401k loan or roll over your balances into a new 401k plan called a Rollover as Business Startup or ROBS.
Small Business Administration (SBA) loans are partially guaranteed against default by the federal government so they’re less risky than conventional loans. The standard SBA loan for franchisees is known as the 7(a). This type of loan is issued by banks or other qualified lenders to provide short-term working capital and to purchase equipment. In order to qualify for this type of loan, you must be creditworthy, be able to contribute some of your own funds toward the business, and also prove that you will be able to repay the loan out of your business cashflow.
4-Secured & Unsecured Loans
Many franchisees turn to traditional financial institutions, like their banks or credit unions, to finance their upfront franchise costs. Since there are so many lenders out there, you have many options to choose from. And it’s easy to shop online for the best rates on websites where lenders compete to get your business. In general, you’ll get better rates with secured loans where you must put up collateral, whereas you can usually obtain an unsecured loan faster, but not typically with terms that are as favorable. Be sure to shop around to get the best rates and terms.
In addition to these business financing options, there may be grants or government programs that you qualify for, including those aimed at minority entrepreneurs and veterans. The Patriot Express loan program, for example, offers low rates and fast approvals for active-duty military preparing to transition to civilian life.
In addition to government and grant programs, some franchisors also offer special discounts to service members and other groups. MaidPro, for example, has a special discount program for veterans valued at $15,000.