How to finance your franchise
Franchising a business can be a profitable venture, especially if you’ve done your research. They are backed by a parent company with a proven business model, a success record, and brand awareness.
However, even if you stand a good chance of success, you still need the financing to get started. So where can you turn for financing, royalty fees, working capital, and inventory?
First Things First
Before you research financing, you need to prepare your personal finances, credit score, and past obligations. Making a balance sheet of your assets and liabilities will give you a good idea of where you stand financially.
Your assets include your cash, bank accounts, real estate, cars, securities, bonds, or anything else with value. Your liabilities are your bills, current debts, and other loans or people to whom you owe money.
Next, be sure you know where your credit score stands. A good credit score is a sign of stability, which makes you less of a risk for a lender. Your income and your track record for paying bills on time all account for this score and paint a good picture of who you are and how you treat your finances.
Other things that give lenders a good idea of whether you’re a good investment or not include how long you’ve had your current job and how long you’ve lived at your current residence. If you don’t have a history of stability, you’ll have to explain why.
After you’ve done all of the preliminary prep, you’re ready to put together a business plan. This is a critical component of getting approved for financing because if you don’t have a plan, you pose a risk to any lender.
You need to make sure you think through your plan to include an in-depth study of the market you plan to enter. You must also have cost analyses and projects, accurate pro forma financial statements, working capital estimates, and a marketing plan.
If you are unsure of how to write a business plan or you need guidance, there are plenty of online resources to help you out.
Most franchised businesses also offer financing, and it’s a good place to start. You can get anywhere from fifteen to seventy-five percent of the total debt financing you need through the parent company.
These are structured with a number of interest and payment options as well as some that offer no payments until the next year, giving you time to get up and running. You may also find opportunities for financing equipment, franchise fees, operational costs, or other financial needs.
Research other financing options after you have a good idea of what the franchisor offers. Make a list of your other options as well as their pros and cons. Consider banks, friends, family, or investors.
You may look into using a second mortgage or a home equity line of credit to secure your franchise financing, but keep in mind that if you can’t repay the loan, you risk losing your house.
Stocks, bonds, or mutual funds are also options to secure your loan, but you have to pay taxes on what you use. If you’re over fifty-nine years of age and you have built up a lot of savings, you’ll suffer an immediate loss of income because you won’t be earning as much interest due a decrease in your total balance. If you are younger than fifty-nine, you have to pay a penalty on whatever you withdraw.
Keep in mind that the cost of the franchise doesn’t include other costs like the land, building, fixtures, equipment, salaries, training, opening costs, etc. Think about getting pre-approved or pre-qualified, so you know what to expect.
Other tips include:
- Using your friends and family as the most common source of capital
- Looking for lenders that understand franchising
- Being upfront with all of your lenders, so there are no surprises later
- Filling out your application clearly, and typing it if you can, so there is no confusion or delay
- Attaching as few documents as possible to your application, so the processing goes more quickly and efficiently
- Keeping some capital available by not paying off all of your outstanding debts before you apply
- Finding a partner who has money if you don’t
- Improving your balance sheet by leasing equipment instead of purchasing it
- Buying used equipment and other furnishings to save money
- Using the internet to find the information you need and even filling out applications online in advance instead of wasting valuable time later
- Considering angel investors or venture capital as a source of financing
Financing a franchise is a risk, so understand your options and know exactly what you’re getting into before making any decisions. Conduct internet research, talk to other franchise owners, and make a list of financing options and their benefits, including looking at fast funding options on sites like https://www.quickloansdirect.com/fast-business-loans/.