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Picture this: You find the right financing opportunities for your franchise, and within months of opening your doors, you’re back in the green again. How would you feel? What difference would this make in your personal life? Your professional life?
This time of year is all about seeing green. In franchising, that green is often in the form of legal tender. If you’re eager to start seeing more green dollar bills in your bank account but are hesitant because you’re unsure how to finance your franchise, this post is for you.
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Before knowing how to find financing for your franchise, you must first know what type of investment you’re hoping to finance. The amount you’ll need to invest to start your franchise varies widely depending on which franchise you want to start. Some franchises can be started for under $1,000, while others require more.
In addition, you’ll want to consider how much capital you’ll need to start. If your franchise is location-dependent, you’ll likely need to invest in real estate and equipment to get started. While having an up-front investment can initially seem daunting, knowing where to find the financing options to cover those initial costs can help you see the possibilities of getting started. Here are three places you can look at when identifying what type of funding is available.
1. Personal Savings
Many people start by looking at their personal savings accounts as a means for financing their franchises. Using personal savings can help you avoid taking on new debt. However, it can also dent your reserves, which isn’t always ideal either.
Talking to your financial advisor is a good idea to determine how much of your personal savings you feel comfortable investing in your new venture. Then, with that figure in mind, commit to sticking to it. Often, people are tempted to keep dripping in more cash to their franchise until they’ve stretched beyond their means. Instead, come up with various financial milestones to meet before you make your next investment via your personal savings.
2. Tax-Free 401(k) Investment
Similar to leaning on your personal savings is leaning on your 401(k) to start your franchise. Before you start withdrawing money from your retirement savings, be sure to talk to a financial advisor. Typically, when a 401(k) owner withdraws money before their 60th birthday, they’re met with a 10% early withdrawal penalty.
There are legal ways to avoid that penalty, however. Working with a financial advisor to help you navigate starting a new corporation and then opening a 401(k) for that entity will help you control your money and put funds directly into your new franchise business. This technique is best done by financial experts. Be sure to work with a professional in this area if you want to use your 401(k) to invest in your franchise.
3. Get a Loan
Two types of loans are available to future franchise owners — conventional bank loans and Small Business Administration loans.
Conventional bank loans are excellent for anyone with a strong business plan. Before you approach your bank to request the loan, you should reach out to the franchise you want to start and get information about their story. The more you can share about their financials in other markets, the easier it will be to sell the concept to the banker approving your loan. Then, you can commit to paying off that loan in a specific time frame. Knowing what you’ll need coming in each month via your business to pay back that loan will help you understand how to budget accordingly and make approaching the franchise more doable.
If you can’t get a conventional bank loan, you may want to try a Small Business Administration (SBA) loan. While these loans can be challenging to navigate, the federal agency also guarantees the loans, so they’re worthwhile if you’re dedicated to your new franchise investment. In addition, interest rates are typically lower than the market rate, saving you money in the long run.
Kimberly Crossland is the founder of Roadpreneur and Cruisin' + Campfires, two companies designed to keep families together and living in freedom through travel and entrepreneurship. The goal of both businesses is to inspire meaningful change through the power of a strategic, thoughtful approach to life and business. In her free time, you can find her looking for a new adventure together with her two boys.