The franchise industry can be a lucrative one. That is why endless entrepreneurs, business professionals, and investors turn to franchise businesses every year. It’s a relatively safe business model with plenty of upside and room for growth.
However, your ability to be successful with a franchise ultimately depends on your capability to get franchise financing. Unless you’re sitting on a sizable nest egg that you’re comfortable giving up, it’s going to have to come from a third-party.
The good news is that people get franchise financing every single day. There are a variety of options that may work for you. The key is to figure out which one fits your situation best.
Small Business Association (SBA) Loans
One of the most common routes for new franchise financing is a loan guaranteed by the Small Business Administration. The SBA doesn’t dole out loans directly to the borrower. Instead, they approve loan applications forwarded to them by an authorized lender – usually a bank.
The SBA backs certain loans intended to start and grow small businesses up to 90%, minimizing the financial risk both for you, the borrow and future business owner, as well as the lender.
The SBA is strict about who they accept; however, if they accept your application, you’ll likely see lower interest rates, lower down payments, lower payments, and more flexible terms than standard lenders on loans up to $5,000,000.
Retirement Rollover or ROBS Financing
If you have more than $50,000 in your retirement fund, rolling over a 401(k) or IRA is a fast, debt-free solution for franchise financing. Because you’re using your own money and not taking on debt, you can pay yourself a salary from the start, and not having to worry about interest or loan payments can help bring your business to net positive sooner.
A retirement rollover is essentially the process of reallocating your investments from your current holdings to your own company without the penalties of early withdrawal. One of the main disadvantages is the risk of losing your retirement savings if the business fails.
Home Equity Loan
Leveraging the equity in your most significant asset is a popular franchise financing option for entrepreneurs in need of start-up capital. However, losing your home is a serious risk if you can’t make your loan payments.
With that in mind, a home equity loan is comparatively easier to acquire than other loan types. If you do decide on a home equity loan, you have two options:
- Standard Home Equity Loan – This works like a mortgage – you borrow a large sum and make fixed monthly payments with interest that’s likely tax-deductible.
- Home Equity Line of Credit – This type of loan gives you access to smaller funds as you need them up to a fixed amount determined before you sign for it.
Securities-Backed Line of Credit
You can leverage assets like stocks, bonds, and mutual funds to secure a loan, as long as they’re not part of a qualified retirement plan. A securities-backed line of credit allows you to access franchise financing based on the value of your portfolio without having to liquidate those assets. It’s an interesting solution to both take advantage of and maintain your long-term investments. The approval and distribution process is generally quick and typically takes fewer than 10 days.
Franchisor Funding
Often, a franchisor will loan money to a franchisee to get their business off the ground. Sometimes, they partner with a financial institution or lender to provide loans. The benefit of getting a loan from their partner lender is that the lender is already familiar with the brand’s business model, and there is potential to get fast financing.
However, franchisors typically won’t finance the entire startup because they see your capital investment as a sign that you’re serious about the business. However, it’s fairly common to see financing in the form of 15-75 percent of the debt burden.
Next Steps
Now that you’re familiar with all of the top franchise financing options for buying a franchise, start looking into companies or lenders that offer that financing option. Chances are, there will be more than a few financing providers for you to choose from even after you’ve taken this step.
If you’re still shopping around for the right franchise choice for you, consider the booming healthcare franchise industry.
American Family Care has been helping people realize their dreams of business ownership since 1982, when D. Bruce Irwin, M.D., opened the first American Family Care Clinic (AFC). AFC currently operates more than 220 facilities across 26 states. It is not necessary to have a background in healthcare to own an AFC franchise. In fact, more than 60 percent of AFC franchisees do not have medical experience.
Now that you have an idea of how to get franchise financing, put that money toward a sold investment: an AFC clinic of your own.
Click here to contact us today to learn more about what it takes to get started!
