FranFinders – How do you Fund a Franchise?
The exciting part of what we do is work with you helping you find the right franchise business that meets your goals and helps you to either leave your job, grow your empire or even to create a legacy for your family. That’s the fun part. The heavy lifting comes in when we work with you on ways to help you fund the purchase. Show me the money. If you have cash set aside in a savings, a non-retirement investment account, or under your mattress, then use that. It seems obvious, right. Well, not so fast. The average franchise we work with has a total investment ranging from $50K – $150K. That’s a lot of cash. So, most folks like to look at other options in addition to cash. Pull it out. If you own a home with equity (more value than you owe), you may be able to use a home equity line for a franchise purchase.
If you use the home equity approach, you’ll need to satisfy the bank’s guidelines for debt ratios and income. So, you may not be able to leave your “day job” right away to start your business, since the bank will want to make sure you can pay back the line. Roll it over. If you have a 401(k) plan, there are programs that allow you to roll that over into a Self-Directed IRA in which you can invest in your own company, while avoiding early distribution penalties. These plans are best for those who have at least $40K to rollover, since there are fees involved with setting this up. The upside of this is that it is not a loan, so you won’t be in debt; the downside is that there is a lot of paperwork and fees required to maintain this program. You’ll need an tax attorney and CPA to give you advice on this strategy. Borrow it.
The Small Business Administration has many lending programs for franchise purchases, and the most popular one we work with is the Advantage Plan (7a Loans). Business purchases can go up to $150K unsecured with you having at least a 680 FICO score (as of today). All you would need is a “cash-injection” of at least 10%. You would need to have a positive net worth and the ability to pay the loan back. This last point means that you have an income from another source other than the new business. Since we work with people with a myriad of financial situations, we end up using a combination of strategies to get the deal done. So it’s not a “one-size-fits-all” answer.