So many Americans want to own their own business, be their own boss, and build a financial future that will allow them to live their dreams and enjoy life without the worry and stress that being inundated with bills can cause. Franchising is one of the easiest ways for the average American with some investment money to get started in the business world. Buying into a franchise allows you to get started in business with an established brand name, a built-in customer base, an established business plan, and established products and operating procedures. A franchise can be looked at as the quick road to running a business, but what if you don't have investment money on hand? Most people simply don't have the money lying around to open a franchise, so how do you fund your big dream?
Sources of Income
- Personal Loans from family and friends
There are actually a lot of avenues available for finding the money needed to buy your franchise. The obvious choice is family and friends. There are a lot of people who suggest borrowing from family and friends is never a good idea, but if you know people who have money you can borrow, take advantage of that situation and borrow. Make it a legal contract, just as you would if you borrowed money from a lender. Maybe you've even got a friend or relative that would be willing to go into the franchise with you as a partner. This can be a workable solution if all parties involved are on the same page and understand that the loan is part of a business deal.
Unfortunately, not many of us know someone who has the extra money to invest. That means finding other sources of income. There are certainly plenty of options, depending upon whether or not you own a home, have a job with a steady income stream, or you're a veteran. The most obvious place to find financing is from a bank. You can take a second mortgage out on your own or put up any other collateral you might have to secure a loan.
- Bank loans
Before you approach a bank for a loan, be sure you have a business plan that shows you have researched the franchise you want to purchase and its potential. If you have outstanding issues on your credit, make an effort to clear them up before you approach the bank. Most banks are going to look at your income first to see how you live on the income you have coming in. They want to see if you have good management skills. The idea is simple. If you can't manage your personal finances, it isn't likely you will be able to manage business finances. This makes you a poor risk for any type of business loan. The size of your income isn't necessarily the consideration. Some people with modest incomes pay their bills and manage their money well, while some who have huge yearly incomes show no ability to manage finances. Making sure you have a great track record of paying your debts and living within your means before you approach a lender for a loan will go a long way toward getting the loan.
- Small Business Association Loans (SBA)
The SBA is another option. Many people believe the SBA makes loans directly to entrepreneurs for the sole purpose of starting a business. This isn't the case. The SBA simply makes a guarantee to banks or other lenders to pay back a portion of any loan the bank or lender makes for a business should the business fail and default on the loan. When a business applies for an SBA loan, that business is applying for a commercial loan through a bank or authorized SBA lender. Only banks and lenders that are structured according to SBA requirements are authorized for the SBA guarantee. The SBA loan takes away some of the risk to lenders normally associated with lending money to entrepreneurs who don't qualify for traditional bank loans. For this reason, an SBA loan guarantee can make opportunities to start-ups, businesses that want to expand, entrepreneurs looking to get into business for the first time, and minority and special interest groups. There are a number of different types of loans available through the SBA, each for a specific purpose and with specific criteria.
Remember, an SBA loan isn't a guarantee to the borrower. A lot of people assume the Small Business Association automatically gives loans to someone who wants to start a business. This isn't the case. First, you need a lender that works with the SBA and has a track record of making small business loans. The process for an SBA loan can be time consuming. Your personal credit score will need to be 660 or higher. For microloans (under $50,000), there may be smaller credit score requirements, but you will need to provide collateral to cover the loan amount. In addition, SBA loans require all of the same components as a traditional loan.
The good news is, when you want to open a franchise, the SBA is more than willing to issue loan guarantees for franchise entrepreneurs. In fact, because a franchise has an established track record, a recognized brand, and a built-in customer base, securing an SBA loan for franchises is easier than it would be with a brand-new start-up. Some lenders won't even work with a business that doesn't have a track record or a business that shows profit. Many banks that may not work with you might be more likely to work with you if you are open to an SBA loan guarantee. Since the SBA loan guarantees as much as 90% of a loan, this makes issuing a loan more attractive to a lender. You submit a loan application to a lender for review, and if the lender finds the application in order, they forward the application to the SBA. If the SBA approves the loan, your lender will issue the loan. Your payments are made to the lender, not directly to the SBA.
A Rollover for Business Startups (ROBS) is an option for funding a franchise. ROBS is a way you can invest $50K or more of the funds from your retirement account (such as a 401k or an IRA) into your business without early withdrawal penalties or taxes. Since a ROBS isn't a business or 401k loan, there isn't any debt or giant interest payments associated with it. A ROBS lets you access to your retirement account to fund your franchise without borrowing it or cashing it out. This can be an effective and ideal way to finance the franchise of your dreams, but whether or not it's a good plan for you depends on your personal circumstances, your goals, and whether or not you want to use your retirement funds as capital to start a franchise. These are things to consider before determining if a ROBS is right for you.
Franchisor Funding Help
Many franchisors either have a system in place to help with the funding of their franchise that allows investors to borrow the money necessary to get into the business. These programs allow franchisees the opportunity to pay the loan off as part of the franchise agreement. Other franchisors work directly with the SBA to help with financing. Not all franchisors do this, so if you are specifically looking for this kind of financing, you're search should be centered around finding a suitable franchise opportunity that does have some kind of finance assistance.
Other Options for Franchise Financing
There are other ways you can secure financing. If you are a veteran, the Pilot Express Loan Initiative, introduced in 2007, provides a streamlined loan based on the SBA Express program but with better guarantees and interest rates. The SBA guarantees 85% of the loan amount, making it more attractive to lenders, and since the credit score requirements are much lower, the loan is easier to get.
Many creative entrepreneurs have found bold ways to finance a franchise. Not all of them are good ideas because many come with extensive risk. Other options for financing a franchise include using a credit card, cashing out home equity or taking out a second mortgage, borrowing against a 401k, personal financing (assuming you have the funds on hand), crowd funding, third-party investors, or angel investors. If you've got the determination, drive, and desire to succeed, you can find the funds to start a franchise today.
Where to Find a Franchise to Buy
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