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5 Questions to Ask Before Financing Your Franchise

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Not everyone has tens of thousands of dollars sitting around in their bank account, waiting to be invested in a franchise. If that’s the case for you, don’t assume you can’t become a franchisee because you don’t have the startup capital. You’ve actually got several options when it comes to franchise financing.

To figure out which is right for you, ask yourself these questions:

1. How Much is This Going to Cost Me?

You know how much the franchisor requires for your initial franchise fee. But also factor in those royalty fees, business licenses, inventory, and staff payroll. Oh, and you’ll want to pay yourself. Because you can’t guarantee profitability right away, it’s a good idea to budget your expenses for the first year and get that much set aside up front. Otherwise, you’ll plunk down the franchise fee and then struggle to pay your bills in three months if things don’t go according to plan.

2. Do I Have Money in Savings?

If you do, fantastic. If you don’t want to take out a loan, start setting money aside now and project when you’ll be ready to take the plunge. Also consider temporarily borrowing from your retirement fund, but only if you can promise yourself you will pay it back long before you plan to retire.

3. How’s My Credit?

If you’ve got a good credit score, you should have no problem getting approved for a small business loan. If your credit isn’t that great, start working on rebuilding it now so that in a year or two you’re better positioned. If you do plan to take out a loan, gather all your financial documents, including personal financial statements, to make the loan application process go smoother.

4. Do I Want to Answer to Investors?

If you’re looking at taking on an investor to get a cash injection, realize that means the investor will own equity in your company, and therefore will have a say in some of the business operations. If you don’t mind having a partner, by all means, consider this route. Or if you want an investor with limited power, make sure you outline what you’re willing to give up in terms of control at the start of the conversation.

5. Does the Franchisor Offer Financing?

Some franchisors partner with third parties to provide franchisee financing, so see if the franchise you’re interested in offers this as an option. Just don’t automatically choose it; first see how the interest rates compare to traditional SBA loans, and then make your decision.

Susan Payton is the President of Egg Marketing & Communications, a marketing firm specializing in content writing and social media management. She’s written three business books, including How to Get More Customers With Press Releases, and frequently blogs about small business and marketing on sites including Forbes, AllBusiness, The Marketing Eggspert Blog, and Tweak Your Biz. Follow her on Twitter @eggmarketing.

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