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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...yet.
You’ve actually got several options when it comes to franchise financing. To figure out which is right for you, ask yourself these questions to get started.
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1. What is My Budget (Both Business and Personal)?
Certainly, you know how much the franchisor requires for your initial franchise fee. But you will need to budget for business expenses like a real estate lease, business licenses, overhead, inventory, and payroll as well. Also remember that you will also need to cover your own salary in your budget, as well as plan for unforeseen expenses.
You’re not guaranteed to make a profit in the first months of launching your franchise (in fact, your goal should simply be to break even), so build your budget for the first year, and include any and all expenses, including paying yourself. The last thing you want is to have invested so much and then run out of money, forcing you to sell or shut down your franchise.
2. What is the Estimated Time to Profitability?
While there’s no exact timeline for becoming a profitable business, you can at least get a sense of how long it should take based on other franchisees’ experience. Talk to as many as possible so that you can build your budget accordingly.
Because you will be saddled with a business loan for the foreseeable future, it’s important to get it right. Spend time assessing your options and even comparing banks or lending programs to ensure the option you choose fits your needs.
3. How’s My Credit?
If you’ve got a good credit score, you should have less difficulty 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 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.
5. What is My Net Worth?
Related to credit and savings, one of the criteria a potential franchisor will assess to determine if you’re a good fit for becoming a franchisor is your net worth. Net worth refers to the balance of your assets and liabilities at one point in time. In a basic sense it is your sources of wealth minus the debts you owe.
What this number tells franchisors is how well you manage money—and how successful you will be managing your franchise’s money.
If you have a high net worth, this tells a franchisor that you can be a bit careful about the opportunities you pursue, and they’ll want you all the more. You can find some tips on increasing your net worth here.
6. What are My Financing Options?
Not every new franchisee has the funds to fully outfit a new business, and even if they do, it’s often still a good idea to take out a loan to conserve cash. There are several financing options to consider, depending on your credit profile.
- Franchisor Funding: Your first step should be to ask your franchisor if they offer any in-house financing. Some might offer funding for a portion of the franchise fee or funding to purchase or lease equipment. Some may have a partnership with third parties to provide franchisee financing. But just don’t automatically choose it, however. First see how the interest rates compare to other loans, and then make your decision.
- IRA/401(k) Business Financing: If you have retirement funds you can invest from an eligible retirement account into a small business or franchise without taking a distribution or getting a loan. If you have a Traditional IRA, Keogh, TSP, SEP, 403(b) or a 401(k), your retirement plan may qualify
- Line of Credit: Another option is taking out a line of credit with your bank. This gives you access to cash when you need it, rather than getting a lump sum up front.
- SBA Loan: You may want to consider an SBA loan to finance your new franchise business. The Small Business Administration (SBA) works with banks to offer low-interest rates for business owners and franchisees.
7. Would 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.