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10 Ways to Finance a Franchise in a Tough Economy

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 or 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 to consider having a partner in your new business, both to help you finance the business and to help you run it. Partnerships can be particularly helpful when the partner has strengths in areas where you are inexperienced.

7. Venture Capital
Venture capital is another way you may find financing for your business. Venture capital is provided by an outside group of investors willing to be involved in a high-risk venture with the potential for higher returns and/or a percentage of ownership in the company. However, a venture capitalist’s focus is generally a start-up or struggling business with exceptionally high growth potential, which is not your typical one-unit franchise.

8. Angel Investors
In between the small amount of money you may be able to borrow from family and friends and the large amount of money venture capitalists will loan you, there is another source of financing: the angel investor. An angel investor is a wealthy individual who will provide capital for a business start-up, usually requiring ownership equity in exchange. Because they fund high-risk ventures, they require a high return on their investment. As an example, web sites such as Prosper and Fuynanz provide potential franchisers an opportunity to raise capital.

9. Credit Cards
Credit cards have not been the best source of financing for potential franchisees because of the high interest rates and low credit limits. It usually takes many months before a new business begins to make money and making those high-interest payments can be difficult. Generally it is better to save the credit cards for emergencies and find a better source of financing for your business.

10. Cash
Regardless of your situation, you will need to have cash available in order to complete you franchise purchase. At the very least you will need that money in order to support yourself, to some degree, until your business gets to the break even point. It is essential to have accurate cash flow projections as part of your business plan. In every market cycle there comes an opportunity where entrepreneurs are better off investing their money into something tangible rather then letting cash sit in the bank depreciating under the pressures of inflation.

In the end, the expression that it takes money to make money is as true in franchising as in any other type of business. It will be easier to borrow the money to start your new business if you already have a tidy pile of cash tucked away. Along with this “seed” money, you will also need a great credit record and a history of borrowing and repaying money.

For more on finding the right franchise go to:

About the Author

Andre Chernih is a franchise expert, editor and manager of the web site a collaborative compilation of info, articles, opinions and recommendations created to help aspiring business owners learn about franchising and find the right franchise opportunity.

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