Financing a franchise comes with a significant amount of responsibility and costs. Like any small business, you will need to draft a detailed business plan and research the industry and the franchise before opening your doors.
This hard work will pay off when you approach lenders. You may not want to obtain loans from a bank without Small Business Administration backing if the lender requires you to put up all of your personal assets. You'll need cash to start a business, and your personal savings will help float your business at first. Included below are other options for financing your franchise.
SBA Loans
FRANData estimates that at least $1.8 billion in SBA-backed loans were franchise-related in 2006. The Small Business Administration has a franchise registry managed through FRANData. The registry lists franchises that have preapproved SBA franchise agreements; if your franchise is listed, it will help speed your loan application. Note that the SBA does not issue loans; it only serves as a guarantor. You will probably have to pledge personal assets, including your home and property, to guarantee the loan.
Family and Friends
Consider approaching family and friends to help finance your franchise. Depending on your relationship, they can be great resources. Many times, however, mixing the personal and the professional can get tricky. If you decide to lean on friends and family, create written agreements detailing loan or investment terms. This may help prevent future disagreements or misunderstandings.
Home Equity
Borrowing against your home can be an appealing financing option. Home equity lines and second mortgages are generally quick and easy to access, assuming you aren’t already carrying a lot of debt. Mortgage and home equity rates are relatively low and you get to write off the interest. The downside? You are risking your house. Keep in mind that taking out a home equity line, which is different from a second mortgage, can cost hundreds of dollars in fees.
Franchisor
Franchisors don't usually finance franchise operations. But some franchisors will tell you about operating costs and profits and will recommend their financial institutions. This can help you get loans to establish your business, and you'll have a closer relationship with the franchisor. Franchisors will sometimes offer debt financing through their financial companies to help you get your startup off the ground.
Retirement Funds
You can transfer most retirement pensions into a plan that finances your new business. An entrepreneur rollover stock ownership plan (ERSOP) is a process that involves the creation of a C corporation and the establishment of an employee stock ownership plan for the new company. Your existing retirement funds are rolled over into the plan, which then buys up the stock, thereby funding your new corporation. Afterwards, the C corporation can use the money to purchase a new or existing franchise. The business must be incorporated to shelter the pensions from early-withdrawal tax penalties.
This tactic is complicated tax-wise, not to mention incredibly risky, so you'll need financial advisers. SDCooper Company, a proponent of the ERSOP, charges at least $800 per year to manage the plan. This plan has been marketed to franchise owners, but it's unclear if the government will close this loophole. More importantly, you should seriously weigh whether you want to risk your retirement funds to finance your franchise.
