Are you trying to invest in the best franchise to own but aren’t sure where to start? There’s plenty of appeal to becoming your boss and having a direct say over your income. An average middle-class salary alone probably won’t be enough to make your dream a reality, but that doesn’t mean starting a franchise is impossible – even on a limited budget. You just have to know where to find the assistance you need.
Start-Up Costs
Start-up costs vary widely and can range from as low as $10,000 to more than $1,000,000. A significant factor is whether or not it will be necessary to own or lease real estate for your business. The required costs for opening a franchise are always in the franchisor’s Franchise Disclosure Document (FDD). Item 5 contains the initial or franchise fee – the cost to join the franchise system – which is typically between $10,000 and $40,000. Article 7 lists additional start-up costs required, such as real estate, equipment, inventory, signage, business licenses, and insurance. You will also want to include a budget for professional fees for accounting and legal advice.
Initial Budget
To determine what you can afford to invest in a new business, you need to have a good understanding of your current finances. You can start figuring your net worth by compiling a balance sheet that lists all assets and liabilities. Some franchise experts believe you should not invest more than 15% of your own money, but this percentage may vary. Seeking the consult of a financial advisor is wise because they can help you determine how much of your own money, you can afford to invest based on your specific financial situation.
Unless you’re looking for a part-time franchise, you will likely need to borrow the majority of the funds. In general, lenders require you to provide 20-25% of the total investment. For example, if you have $50,000 to invest, you will want to research franchise opportunities in the $200,000 range.
Bank Financing
Borrowers with good credit and collateral may be able to get a traditional loan from a bank or credit union. Most lenders are more likely to offer financing for a franchised business because they are associated with an established brand in the marketplace. However, if you are interested in investing in a lesser-known brand such as an emerging franchise or don’t have a stellar credit rating or collateral, a traditional lender may not be an option, and you will need to look elsewhere for funding.
Franchisor Input
One of the first places to look for financing assistance is to the franchisor. Most franchisors offer debt financing and will back either all or part of the loan. These loans can have several payment schedules, so be sure to check with the franchisor regarding the specific terms and repayment schedule. Some franchisors may also be able to assist with leasing necessary equipment, which is often a large portion of the start-up costs.
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Certain franchisors offer incentive programs for veterans, minorities, or first-time franchisees, including a discount on the franchise fee or other costs, or special financing assistance. Be sure to check with the franchisor about any programs they may offer if you fall into one of these categories. Some franchisors may also have relationships with a franchise financing company or one that matches borrowers with lenders such as Benetrends.
SBA Loans
It’s often easier to qualify for a Small Business Administration loan than a conventional loan, especially if you have an insufficient down payment or absence of collateral. These loans still connect to a bank or other financial institution. As a result, they have an SBA-guarantee and usually involve longer repayment terms and carry lower interest rates. SBA approved franchisors can offer expedited application processing to potential franchisees.
Ask the franchisor if they have a current agreement with an SBA-approved lender. If not, you can contact your local SBA office to find one. Also, the SBA’s Veteran’s Advantage Program offers special incentives for small business loans to veterans of the U.S. military.
Self-Investment
If you have retirement savings, it’s possible to borrow from it to start a business. Rollover as Business Startups, or ROBS, allows you to use money from a 401(k) or 403(b) IRA to pay the initial or ongoing costs of a franchise business. In this case, you will incur a tax liability on the money you withdraw from a retirement account.
One way to avoid these penalties is to open a securities-backed line of credit instead. This type of loan involves your investments and doesn’t require you to remove money from your retirement accounts. Or you may opt to take out a home equity loan on your property. These loans will help you avoid borrowing money from others. However, they can put your home and savings at risk, so exercise caution.
Non-Traditional Borrowing
When more conventional lending sources can’t fund your franchise, you may need to look beyond traditional methods. There are many new online lending opportunities for those who don’t qualify for other types of financing. Companies such as Kabbage and On Deck are significant players. However, these lenders may not be able to provide enough funding to cover all of your start-up costs.
Investors may set constraints and expect a return on their investment, which will cut your profits at first. Still, it may be worthwhile to take on investors if it allows you to get the franchise up and running. No matter what kind of financing you choose, it’s essential to get all the facts in advance. Do your research when it comes time to repay loans or investors down the line.
A limited budget does not have to mean postponing or giving up your plans to become a business owner. By finding the right financing options to meet your needs, you can expedite your franchise’s future ROI.
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About Cinch I.T.
Since 2004, Cinch I.T. has been providing customer-focused I.T. support for businesses of all sizes. As one of the top technology franchises in the country, Cinch I.T. delivers the fastest and friendliest computer franchise support in the industry! Cinch’s franchising service consistently ranks as one of the fastest-growing franchises in business publications, including the Worcester Business Journal, Inc. 5000, and the Channel Co. CRN. To learn more, visit cinchit.com. For more information about franchise opportunities, visit cinchfranchise.com.
