How to Finance a Franchise
March 31, 2021
Congratulations! You’ve researched opportunities and decided that in order to own your business, you’ll want to buy a franchise. That’s an excellent start, but there’s more to consider. While the franchise investigation process can often move quickly, it’s best if you have an idea of how you will fund the franchise (or how you think you will fund it) before even meeting with the franchisor. Here are some options to consider:
Self-funding is ideal if you have the means to do so. Some people will tap into their personal savings or even borrow from family and friends to bring their self-funding dreams to a reality.
- Pro: There are many advantages to this option as you have more control and can retain full ownership with 100% of the profits.
- Con: You may not have enough to cover all the funding you need.
Second Mortgage or Home Equity
Another option to consider is getting a second mortgage or home equity. The risk with this is that your home is the collateral and, if for some reason you aren’t able to make payments, you could lose your home.
- Pro: Gives you access to funds if you need it and usually a quick approval time due them being assets you already own.
- Con: Your current home is collateral, so if you aren’t able to make payments, you risk losing your home.
Many people opt to use some of their retirement funds to help achieve their business ownership dreams. 401K business financing, also known as Rollovers for Business Startups (ROBS) is an option that allows you tap into your 401(K), IRA or other retirement accounts. This could be a great option if you do not have cash on hand.
- Pro: Start your business debt-free.
- Con: There may be tax implications, so discussing with your tax advisor before making any moves is recommended.
SBA loans are small business loans that are partially backed by the government (Small Business Administration). This backing helps to reduce the risk for the financial institution or bank who is issuing the loan. There are various types of SBA Loans with 7(a) and Express being the most popular.
An SBA 7(a) loan allows you to fund many purposes such as equipment, inventory, working capital and more. The loan amount will range up to $5 million with repayment terms of 10-25 years. Interest rates are typically low.
An SBA Express loan caps out at $150,000 with the SBA guaranteeing 50%. This is usually a quicker approval process than the 7(a) loan.
- Pro: Partially backed loans by the SBA make this an attractive option for lending institutions.
- Con: The applicant’s personal credit is reviewed as part of the approval process.
Other Financing Options
Traditional bank loans are another route to consider via a bank or credit union. These loans often require substantial documentation and the applicant to put up a portion of the costs, usually 20-25% of the upfront costs out of your own funds.
Lastly, there are financing consultant companies, such as Benetrends and FranFund that can help you navigate the ins and out of financing your franchise dream. With any major financial investment, you should consult a financial or tax advisor.
If you’re interested in exploring the Home Clean Heroes franchise opportunity, give us a call at 844-949-4376 to learn more about what operating a home cleaning service is all about. And be sure to check out what our franchisees have to say about the brand!