Are you planning to explore the ambitious and entrepreneurial side of yours? Then the franchise business model is your perfect way to start. With the franchise business, you are part of an already successful business model, thereby reducing the risk factor by large margins. Now you might be worried about the funding that is needed to start a franchise. Honestly, it is a costly affair and one cannot own a franchise without having to spend any money, but it is still possible to acquire a franchise without investment. Owning a franchise is much cheaper when compared to starting a business from scratch. But some initial costs are unavoidable. However, the costs can be reduced significantly by going for the financing options that are there to help share the burden.
What are the costs of owning a Franchise?
To be able to look for funding one first needs to know about the costs involved when starting a franchise. The franchise costs are not fixed amounts. They vary depending on the type of business and the brand involved.
- The initial costs can range somewhere between $10,000 to $100,000.
- You will also have to pay a royalty fee as a franchisee. The fee structure will vary from brand to brand. Usually, 5 to 50 percentage of the revenues will be charged as a royalty fee.
- Franchisees also have to pay marketing fees every year. This amount is spent to ensure that the location of the franchise is well promoted and succeeds in the local market. 1 to 4 percentage of the revenue makes up the marketing fees.
- Additional costs include insurance, business license, hiring, equipment, and inventory.
Even though owning a franchise is less expensive than having a typical business, it is still an expensive endeavour to make.
How can you get money for a franchise?
If you are planning to buy a franchise but have no funds, then the following options are there for your rescue:
- Financing from Franchisor
Many brands offer franchisor financing. They understand that it might be difficult for the franchisees to bear the expenses of buying a franchise. Hence, they lend the money that is needed. Some brands will help you to lease equipment also. The first-time franchisees, minorities, or veterans can qualify for some incentive programs. Under such programs, you might get a discount on the franchise fee or other initial costs. However, the franchisors will expect you to have some lump sum in savings.
Weed Man, UPS store, and Marco’s Pizza are some such brands that finance their new franchisees.
- Small Business Administration (SBA) Loans
This is a popular funding option that franchisees with fund shortage opt for. SBA is an institution run by the government that provides long term funding at great rates. This institution doesn’t provide direct loans. It just guarantees a loan from some bank or credit union. This can be useful for the franchisees who have a low credit score to get a loan approved by the bank.
SBA loans are available in two different types:
- SBA 7 (a): one can get loans up to $5 million and the repayment time is 7 to 25 years. The rate of interest depends on the loan amount and length.
- SBA CDA/504: this one is a collaborative effort in which CDA or Certified Development Company provides 40 percent of the amount needed, 50 percent is provided by a bank or credit union, and the remaining 10 percent is for the franchisee to pay.
SBA loans can be acquired easily but the process is quite lengthy and the lender should have a decent credit score.
- Home Equity Loans
The difference between the property value and the amount owed on the property is known as equity. On owning a house, you can use this equity as collateral for getting a start-up loan to buy a franchise. If the property value increases or the mortgage value goes down then the equity will build up.
You cannot expect to get the full amount of equity with home equity loans. A maximum of 80% of the property value can be received. This loan can be used for covering start-up costs or paying the franchise fees.
HELOC or home equity line of credit can be your other option to pay the franchise fee. You will get a flexible line of credit instead of a whole sum, based on the equity of the property you own. In this system, you first set a credit limit for a certain amount of time. Within this draw period, you can withdraw funds within your credit limits. The repayment period will follow once the draw period ends, which is usually a one-year time. Once the repayment is done you can re-enter the draw period.
Both home equity loans and HELOC are good funding options for buying a franchise as they have competitive interest rates, flexible use of funds, and long terms for repayment. A solid repayment history along with a high credit score and low debt-to-income ratio are the criteria one must fulfil to avail of such loans. Also, the property is at risk when you take a home equity loan.
ROBS stands for Rollover as Business Start-ups. Under this scheme, you buy a franchise from the funds you already have in your retirement account. Drawing funds from a retirement account early can cause penalties. But with ROBS you can draw funds within a few weeks without having to pay any penalty.
So how does this work? First, a Corp is established, and then a retirement fund is created. Then the funds in the existing retirement account are rolled over to this new account. The funds will then be used to purchase stocks in the Corp. The cash earned can be used for buying a franchise.
A qualifying retirement account is all you need to be eligible for ROBS. This is not a loan so there are no worries about having a high credit score, or a certain amount of income or other such criteria required for other types of funding.
You will require to work with a ROBS provider to establish the Corp and create a retirement account for you. A monthly fee for maintenance and reporting the account will be needed in ROBS.
- Online loans
Loans for buying a franchise has been made easier with the internet. In this online business, it might be difficult to find a lender. Competitive business loans are tough to look for when your business is at its early stages or when you are a beginner with a low credit score. The lenders usually look for experienced people who have decent credit profiles plus annual revenue. As a beginner, you might not have any of these.
A personal loan for a business is a way to get funding for owning a franchise. To qualify for such funds, you need to provide personal information which includes annual revenue, personal credit score, history of repayments, etc.
- Franchises with low cost
The best way to start the franchise business is to look for the franchises that you can afford. You can make minimum investment and make your way to business ownership with such low-cost franchises. You will have to put in a lot of time researching to find such franchises. The bigger brands like McDonald’s have a high franchise cost and the operation costs are also high.
Look for start-ups or franchises that offer heavy discounts to the new franchisees. Many organizations offer discounts to franchisees who are females, minorities, military servants, or veterans.
- Business partners
Finding a business partner can be a way to start a franchise business without any investment. Your partner will share the cost of buying a franchise and also the profit made from the business. The partner can be anyone from your family, friends, colleagues, or any person who is willing to invest in the business.
The partnership means the decisions will be mutual and you will be a partial owner of the franchise. Make sure to get all documents and agreements made with the help of an attorney. This is for the protection of each partner’s rights and also to ensure compliance with Securities and Exchange Commission regulations.
- Traditional bank loans
This is a known way in which you approach a bank or a credit union for a loan. Among all the funding options, this one is the least preferred. To qualify for a loan from a bank or credit union you need to have an excellent credit score. In most cases, 20% of the start-up cost or franchise fee needs to be paid by the borrower, which one might not have. Also, the lenders are willing to loan only when the franchisee is buying a reputed franchise organization.
A franchise business may seem to be an easy way to start business ownership. The challenge is to find funding. With the options given above it is clear that affordable funding options are available. All you need to do is in-depth research. Explore all options and finally decide which one suits your business best and can be good for the long term.