Which Franchise Funding Option is Right for Me?
So, you’ve got the perfect business idea…. There is just one problem: you don’t have the cash to get it off the ground. How will you raise the funds to not only start a business but carry it through the difficult times and help it expand and grow? There are many options out there for business and franchise funding, but which one is right for you?
Personal Cash Funding
One of the most common funding methods is personal investment. Personal cash funding is just what it implies: using your own cash to fund your business.
Pros: The two biggest benefits to using cash that you already have are the availability and the avoiding debt. It is obviously a nice perk to not have to go and acquire funds from someone else. Smart business people keep cash available for opportunities, and this can be an example of that situation.
Another great practice when looking at franchise or business ownership is to start out debt free. Paying with cash you have on hand keeps your business in a great place financially.
Cons: Generally, it is regarded as best to protect or preserve your personal assets for an emergency and use someone else’s money to fund your business. When your business runs into a tight spot, and it will, it’s best to have cash available to keep the doors open.
Funding Example: Using your own cash can really be done in any type of situation, but it is typically done in business or franchise startups that require less upfront capital.
Although there have been some successful ventures started with large personal investments, there have been many more that have failed. If this is the route you choose for your funding, it is best to seek the advice of a funding professional to help guide you through your start-up.
Borrowing From Friends and Family
Your friends and family are often times your greatest supporters. However, once money lending comes into the picture, the dynamic of the relationship can change. Becoming a debtor to your inner circle may cause irreparable rifts. Conversely, starting a business with the financial backing of your friends and family can have a more positive outcome. In many occasions, they may devote time, effort and other resources above and beyond the financial assistance because of their vested interest in the success of the partnership. This source of funding should be well thought out and, at many times, be a part of your overall funding “potpourri.”
Pros: Funding can be hard to come by sometimes, and having a family member or members with money for your business can be very convenient. Often times, family can be more forgiving when it comes to paying the money back as well. While this is not a suggested reason to use money from family, it does often have more flexibility than most other sources.
Cons: The biggest reason to not use family money is because of the problems that it can cause with relationships. For some reason there is just a special set of emotions attached to the agreements made with family. Some people do just fine with this situation, but man more do not.
Another con of using money from family is that there is not an endless supply. In most situations there will only be one loan, then the money is dry.
Funding Example: Low overhead franchise models are often a time when family money us used. Let’s say you just need a van and some equipment to start a new franchise location in your city. This can make sense if the plan is right.
Local Bank or Credit Union
Having an established, longstanding and positive relationship with your local bank or credit union can be a great funding option for your business. Don’t be discouraged, however, if you are rejected. There can be many qualifying factors to obtain a small business loan from your local financial institution and missing any one of them can result in the rejection of your loan application. Often times, it is better to let the professional lending consultants work their established network of lending resources to find you the best option for your business. Multiple inquiries to your credit can have adverse effects on your loan qualifications for up to six months so having a targeted approach to acquiring loans is usually best.
Pros: Gaining funds from a local bank or credit union opens the door to getting more funds in the future. Since banks thrive on keeping money out and lending, it makes sense in certain situations to keep this relationship.
It’s also nice to have someone locally to talk about finance and business planning issues with. Business bankers can be a very valuable resource for you and your franchise in the long run.
Cons: You have either heard or experienced the downside to banks sometime in your life. Funding institutions require lots of paperwork, lots of credit history, and lots of money down typically. Most likely the best way to express getting bank funds is this way: “If you can pay for something yourself, and don’t need bank loans, then you can qualify for a bank loan!”
Funding Example: Bank loans and SBA loans share similar characteristics. Franchises that require real estate of large equipment, or both are likely candidates for loans. Banks like to have assets to attach to just in case you can’t pay back your loan. This is commonly seen in things like auto repair shops or gyms that have storefronts and valuable equipment.
Did you know that your own retirement funds can be used to help buy and fund new a business or franchise? Rolling over your retirement funds and investing in your company is one of the smartest ways to fund your business. When you buy stock in your new company with your rollover funds, it is tax-deferred and free of penalties.
Pros: The goal behind using your 401k/IRA to fund your business is that you begin your business with no money out of pocket and debt free. This funding option is typically one of the quickest ways to raise money as well. Additionally, when it comes time to sell your business, you will have a tax deferred Exit Strategy Program.
Cons: The main concern when using retirement funds is just that, depleting your retirement account. There are arguments for both sides of this statement, as many believe that one of the best retirement vehicles is an income earning business.
Funding Example: This funding example is the most flexible of all the options because you can purchase and run any legitimate business model that you want to start up. You are only limited by your imagination.
Unsecured Line of Credit
An unsecured line of credit requires a strong business plan and great credit history. With this revolving credit line, a business owner can get pre-approved for up to $100K in 24 hours and can receive funds in as little as 3-5 weeks. Typically, unsecured revolving credit lines do not require any cash injection or collateral. However, a FICO score or 700 or better and 5 years of credit history is needed to secure this funding source.
Pros: Unsecured funds, often referred to as a signature loan, do not require any collateral. This means that as long as your credit is good, then you can secure funds pretty quickly. This allows a potential business owner to make quick decisions and start a business sooner than later. Unsecured funds are also a great funding source to combine with other funds since they do not require much to obtain.
Cons: The biggest drawback to using these funds is the high credit score that is required to gain the amount of funds that most people require. There are also limitations to how you can get to the money, and the interest rates can quickly get out of control much like a credit card.
Funding Example: There are several ways to use these funds. Startup business capital and salaries are a great use for this money. Smaller equipment needs can also be very achievable with money from a line of credit. And last low overhead startups can also be kicked off with a line of credit.
SBA Government Loans
Government backed loans from the SBA are designed to help businesses get up and running quickly. Typically, SBA loans are for anywhere between $75K and $5M. Requirements for an SBA loan will include a strong business plan, 2-5 years of industry experience, a credit score of 680+, personal cash infusion of 20-30% and collateral of up to 100% of the loan value. Smaller SBA loans (called microloans) are available for up to $50K and are generally easier to obtain with collateral and a personal guarantee from the borrower.
Pros: The SBA makes it very clear what they require to get a government loan. There are also a lot more funds available than most other options. Interest rates are normally very competitive because the funds are backed up by the government. This means the bank that makes the loan does not require large interest rates to protect themselves.
Another nice thing about SBA money is that you can use collateral from the business to secure money that is required to get started.
Cons: These types of loans can take several months to complete. The amount of paperwork it takes to complete the process is gigantic, and often is a contributor of why it takes so long to close. SBA loans are also much like the previously mentioned bank loans. If you can get an SBA loan, then you could probably pay for the business yourself. There are a lot of lofty requirements.
Funding Example: Franchise models that require a nice sized store or piece of real estate are prime targets for this type of loan. Retail stores or strip centers often are considered for these loans.
Financing Through the Franchisor
Check to see if your franchisor offers funding to their new franchisors. Make sure you check this option during your discovery process.
So, what’s the right funding option for your business? Often times it can be more than one option. Tenet Financial’s professional funding consultants will help start you down the right path.”
Consult your franchise broker, who can guide you on funding options.