Going into business for yourself by investing in a franchise is an exciting proposition. Initially, you’ll deliberate over which type of franchise is the best fit for you and imagine the future as an entrepreneur. Then, you begin to think through the details. One of the biggest decisions you’ll need to make is, “How am I going to pay for this?”. If you don’t have enough liquid assets to cover all the costs, what are your other options? Several factors need to be taken into account as you determine which path best fits your financial and life situation.
It’s always best to start by asking the franchisor if they offer in-house financing. Some do, some do not. However, even if they don’t provide capital directly from the corporation, many franchisors have established partnerships with preferred financing vendors who offer good terms for the various forms of lending, such as traditional bank loans, SBA loans, and 401K rollovers.
A conventional term loan from a bank or credit union is often the first option people consider. This is where you receive a set amount of cash up front and agree to pay it back, with interest, in monthly installments for a fixed period of time. One good reason for going this route is that a bank will see the advantage of working with an established franchise company versus a risky start-up. However, you’ll need to have good credit and a completed business plan to be seriously considered. If you can make a down payment of about 20%, so much the better.
SBA loans are ideal for someone going into business for themselves, and they are generally available for franchisees who meet certain criteria. In fact, an SBA loan is one of the most preferred ways to go for future franchisees as lenders generally offer lower interest rates and longer repayment terms than they normally would because the SBA reduces their risk by guaranteeing a portion of the loan amount. An important factor that needs to be weighed, however, is that the funding and approval process for an SBA loan takes more time than a traditional bank loan.
Many first-time franchisees turn to their family and/or friends for financing, as surprising as that may seem. The main reason for this is that you can work out the details of how you’ll repay the loans and change the terms at any time, and the rates are almost always better than what you’ll get from a bank. There are a few different ways to go about it, whether it be borrowing a lump sum, asking for a gift, or bringing the friend or family member on as a business partner. It’s possible they’ll want to be part owner, and in some cases the franchisor could require it. Of course, personal loans such as these could come at a great cost if disagreements develop over repayment, and it may not be worth risking the relationships.
Using your own assets to buy a franchise is worth considering, but you’ll need to be well aware of the risks. If you borrow funds from your retirement plan, you will incur tax penalties, but these can be avoided by setting up a C-corporation and rolling the money over into a profit-sharing plan. You may also tap into your personal stocks, bonds and mutual funds, but you’ll need to be sure that they’re not connected to an IRA profit-sharing plan or other qualified loan. And while taking out a home equity loan is a popular option for aspiring franchisees, be careful about the amount you borrow, so that you don’t end up losing your home if you’re unable to pay the loan back.
While it may seem odd to ask a bunch of people you don’t know to fund your franchise, it has become a popular route to consider when other loan options don’t work out. You can either set up your own personal crowdfunding page or look into one of the websites that crowdfund for specific types of businesses. If your financial history isn’t perfect and you are underwhelmed with your other funding options, crowdfunding is worth considering. You’ll need to check with the particular franchisor, however, as they may prefer a limited number of owners and therefore not favor this type of financing.
Once you have your financing figured out, you’ll be able to focus on the next exciting phase of establishing yourself as a franchisee. You can begin to enjoy working for yourself while having the support of an established business.
If owning a math tutoring franchise interests you, connect with one of Mathnasium’s Franchise-Success Executives to learn more. Mathnasium is North America’s leading math-only supplemental education franchise. With more than 1,000 learning centers worldwide, Mathnasium has been ranked on Entrepreneur Magazine’s list of top 500 franchises 15 times since 2004.