Financing

How to pay for your escape from corporate life

Can you afford to buy a franchise? The answer might surprise you.

The day-in, day-out of corporate life is draining. You can only climb so far before you hit the ceiling, and then what? Not to mention with all of the mergers and acquisitions going on, the serious risk of being downsized, furloughed, or having your position eliminated before retirement is very high.

So what’s stopping you from starting your own business?

If you said “money,” you’re not alone.

Franchise companies have a lot of experience opening locations. They know how to launch new units efficiently, save on advertising dollars and shorten the ramp-up time to profitability. Investing in a franchise might be your ticket to controlling your own destiny, but the franchise is going to require a minimum net-worth and initial investment. They are not going to let you bootstrap your way into business.

The good news: Small businesses are the lifeblood of this nation, and there are a lot of financing options to help you join the ranks of American small business owners.

Our accounting partnerscan help you understand all the options that are available for financing a franchise.

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The Complete Guide to Financing Your Franchise

Government-Backed Loans
Franchisor or Seller Financing
Commercial Bank Loans
Alternative Lenders
Retirement Loan
Crowdfunding
Friend and Family Loans

How much does a franchise cost?

The total cost for a franchise is going to depend on the type of business, whether it is service-based or retail-based, and the equipment needed. Service-based franchises’ initial investment range is typically between $100,000 to $150,000. A retail-based franchise includes leasehold improvements and initial investment typically starts at about $250,000+.

Your estimated initial investment will include:

Franchise fee
Working capital
Equipment and supplies
Rent and utilities for your location (if required)
Inventory (if required)
Insurance
Business licenses, as needed
Grand opening advertising
Professional fees (for your attorney, accountant, and other professionals who help you complete the transaction)

Every franchise is going to have a required minimum net worth and liquidity. The franchise knows from experience how much capital is required to start the business and ramp up the cash flow to reach profitability.

We don’t recommend investing more than 50% of your total net worth to be conservative. That will leave you enough of a cushion to meet lending requirements and to live on personally while your business is growing.

Can I buy a franchise for under $10k?

Some franchisors try to attract buyers by advertising low entry costs. There’s nothing wrong with this tactic, and it is used by several respected brands. But before jumping into a “cheap” franchise, keep a few things in mind.

You may not “own” your assets. Some low-cost franchise opportunities come with heavy corporate control. Franchisors like Chick-Fil-A own their locations and equipment and lease it to their franchisees. Franchisees pay rent to corporate along with their royalty fees. They also cover insurance, payroll, and operating costs out of their own pocket.
You need working capital over and above the franchise fee. One of the advantages of buying a franchise is starting with a built-out business model. But that doesn’t mean you don’t have all the same startup costs as any other small business. The franchise fee for Steak n’ Shake may be only $10,000, but full startup costs for a typical location actually run closer to $250,000.
It may be difficult to sell the business. One day, you will want to retire or go on to something new. If the franchisor owns all the equity in your business, it will be difficult or even impossible for you to exit by selling.

Anything that looks too good to be true probably is. Your franchise consultant knows the ins and outs of hundreds of franchise companies and can match you to the best option for your situation.

Financing a franchise with a government loan

One of the most popular ways to finance a franchise is with a loan backed by the U.S. Small Business Administration (SBA). SBA loans provide support for small businesses that have challenges obtaining credit in the conventional loan market. The government guarantees up to 85% of the loan and allows lenders to take more risk on a startup business loan. Banks and financial institutions must follow SBA guidelines for loan interest rates and repayment terms. The SBA provides critical support to help small businesses grow and create more jobs.

SBA 7(a)

The SBA 7(a) loan is the SBA’s primary program to help new and existing businesses. 7(a) loans can be used for most business expenses including working capital, and to pay initial franchise fees, purchase inventory, supplies, or raw materials.

What’s the catch? To be eligible for 7(a) loan assistance, the business must be operated for a profit, be considered a small business as defined by SBA, and engage in or propose to do business in the United States.

The borrower must be able to demonstrate a need for a loan, have a reasonable invested equity (typically between 10-30%) and before seeking financial assistance, use alternative financial resources including personal assets.

SBA Express

The SBA Express program features an accelerated turnaround time for SBA review. While the Standard 7(a) response can take 5-10 business days, SBA express applications get a response within 36 hours.

SBA Express loans may have higher interest rates, but may not exceed the SBA maximum.

Veterans Advantage

Veteran-owned businesses are one of the fastest-growing and significant segments of the US economy. SBA loans made to veteran-owned small businesses come with reduced fees.

Working with Preferred Lenders

The SBA provides select lenders with more processing authority to service, close and approve SBA-guaranteed loans. They are selected due to their above-satisfactory SBA performance and can save you time and money when applying for funding.

State and Territory Resources

The U.S. Small Business Administration isn’t the only government agency that wants to see small businesses succeed.

States and territories also offer small-business financing to foster economic development. Find out what your state or territory offers by talking to a franchise consultant or looking it up on the federal government’s list of resources.

Franchisor Financing

Most franchises do not offer direct financing assistance but may refer you to third-party funding resources.

Franchisors are going to use their purchasing power and brand recognition to negotiate the best possible contracts for vehicles, equipment, lease agreements and other startup costs.

Nobody knows the cost of owning a franchise better than the franchisor.

Seller Financing

If you’re considering buying an existing business, the seller may be willing to finance a percentage of the total purchase price.

When funding this acquisition through an SBA loan, most of the time the lender will require that the owner holds a seller’s note until the SBA balance is paid in full. In other words, the SBA always gets paid first and then the seller. This is to encourage the seller to help the new owners with a successful transition.

Commercial bank loans

When you need money for a big purchase, your first thought is probably to go to your local bank and apply for a loan. However, the bank is likely to reject an application from a startup with no credit. This is exactly why programs through the Small Business Administration exist.

Most commercial banks will require established business credit, historical financials for at least two years, business pro-forma and financial projections before considering a loan.

Alternative lenders

If you have exhausted all of your other options and still need a little additional capital to start your business, you might turn to a non-asset based funding option.

Alternative lenders base their decision more on your personal credit score than other business funding options. Though their loan amounts are often smaller than what you could get through a bank, they offer fast turnaround, easy approval, and access to cash.

That convenience comes at a cost. You may start with a promotional rate of 0% interest for the first 12 to 24 months, then it starts to rise, similar to credit card debt. Double-digit interest rates are not uncommon.

These alternative lending options should be used as a last resort and only when it makes business sense. Do your homework before taking out one of these loans. Make sure you understand and are comfortable with all the terms and conditions.

Retirement Asset Funding

You can use your retirement savings to fund your startup business through an IRS-approved program called the Rollover as Business Startup (ROBS).

Many people would rather use their own savings than take on additional debt. Professionals who have spent many years working in corporate America and contributing to their 401(k) or IRA may have a significant amount of capital they can’t touch until age 65 without paying the penalties.

Borrowing from your retirement to finance your business can be tempting. Before you dive in, remember what those funds are for – retirement.

The good news is, it’s your money, so there is no approval or credit check needed. The interest you pay is going back to your own retirement account and only requires a small percentage.

We highly recommend talking with your financial advisors and accountant as well as a ROBS plan administrator so you fully understand the setup and costs. The ROBS plan requires you to legally incorporate your business as a C-Corporation. Your C-Corp then has to create a special retirement plan. Once both the C-Corp and ROBS plan exist, you will be able to roll over your 401(k)/IRA into your new business retirement plan.

Crowdfunding

Crowdfunding is one of the newer, more creative ways of financing a franchise. Found the perfect business to buy, but don't qualify for traditional financing? Try turning to the community.

If there is local demand for the kind of business you want to open, people may be happy to contribute toward bringing it to town.

You could set up your own crowdfunding page through sites like GoFundMe or Kickstarter. You could also look for an organization that crowdfunds for businesses and franchises.

Some businesses crowdfund for specific industries and business types. They make those funds available through startup loans.

Talk to your franchise consultant about what types of crowdfunding might be available to you.

Family & Friends

It may seem like a simple option to finance your new business by borrowing money from your family or friends. You might talk to people you are close with and determine if they are in a position to invest with you. Be cautious about taking on investors; they can make things more complicated.

It might even cost you personally. A friend or relative who has invested in your business may feel they should have a say in how you run the business. If they run into hard times, or if the business seems to be doing well, they may ask you to pay them back earlier or share in the profits.

If you decide to borrow from a friend or family member, protect your relationship. Treat the loan the same way you would treat a loan from the bank. Hire an attorney to write up a contract that includes the loan amount, the repayment terms, and what, if any, control the lender has in the business. Once the loan has been made, hold up your end of the bargain and follow the repayment terms faithfully.

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