Franchise Advice: Funding Your Franchise

Knowing that you are currently exploring various franchise and business opportunities I’m sure you are also exploring various methods of funding your venture as well so I wanted to share some information on the various methods we’ve seen people use to secure financing over the past 2-3 years. 

Below are several methods including pros and cons and typical costs and requirements for each.

401k Rollovers

*Use retirement funds to fund your business

*Tax and penalty free

401k/IRA Rollover– (i.e. IRA, 401K, 403b, 457, TSP, Pensions, etc.)
Minimum required $45,000

While we typically refer to them as 401k rollovers this type of funding can be achieved from a number of different retirement investment accounts. 401k rollovers allow you to invest up to 100% of your retirement funds into your own business without paying any early withdrawal penalties or taxes.

Entrepreneurs have used this method to fund 100% of their startup or just a portion to meet cash injection qualifications for additional funding such as SBA and unsecured loans. 401k rollovers can offer several advantages including less debt which accelerates profitability, immediate salary for owners, employee benefits, etc. 401k rollovers are perfectly legal and can be achieved in few weeks. The average cost for a 401k rollover is around $4,000-$5,000 which commonly includes consulting services, business incorporation, proper tax reporting, etc.

SBA Loans

*Express loans (up to $150,000)

*Dream loan ($151,000-$350,000)

*Big ticket loans ($351,000-$5,000,000)

*Acquisition/Resale loans

*Commercial mortgage

While the SBA (Small Business Administration) does not actually provide loans they will offer a loan guarantee on up to 90% of the loan to qualified borrowers making the loan more attractive and less risk to the actual lender. SBA loans can be a great method for funding your franchise but even with SBA guarantees can still be challenging to secure in today’s lending economy.

While SBA loans can be secured for most any reasonable business venture they do maintain a list of “SBA Approved Franchises”. SBA approved franchises simply offers a slightly more streamlined process for securing the loan. Typically SBA loans can have terms of up to 10 years with interest rates currently ranging from 2.25% – 2.75% over prime. SBA loans can range from $50,000 up to $5,000,000. There are actually 32 different factors that go into qualifying for an SBA loan but the primary factors are cash investment, credit scores and collateral. Most SBA loans can be secured within 60 – 90 days.

SBA Loans – Requirements
– 675 minimum credit scores
– 10 to 30% cash injection and cash reserves
– Collateral (for loans over $150,000)
– Income Required -or- large cash reserves

Military express loan through the SBA

Loan $150,000 Working Capital For Active Military, Veterans, and/or Spouses.The Mloan streamlined process is EASY, FAST, and reduces the lender transaction costs;Increasing access to working capital for small businesses, franchisees, and entrepreneurs.

Equipment Leasing

Some loans are specifically for the leasing of equipment required for a business. These loans consists of:

*Equipment required by the franchisor 

*Gym equipment

*Motor vehicles

*Restaurant equipment

Unsecured Loans

Often referred to as a “signature loan” an unsecured loan is simply a loan that’s extended to a borrower based on their good credit and requires no collateral. Again in today’s lending environment unsecured loans are not easy to come by. Typically to qualify for an unsecured loan a borrower will need a minimum credit score of 700, have no derogatory credit statements and have less than 40% utilization of current credit accounts such as credit cards and other lines of credit. Unsecured loans can be secured in as little as two weeks but often come with fees and higher interest rates.

Marketable Securities

Use your stock portfolio as collateral for a low interest rate loan.

Peer-to-Peer Lending

Peer-to-Peer lending is a relatively new concept and is where loans are created by groups of investors. For example a $25,000 peer-to-peer loan may comprise of $1,000 loans from 25 different people. There are several services out there that facilitate these types of loans. Generally speaking peer-to-peer loans can be secured within weeks and require no collateral. Most peer-to-peer loans will only be up to $25,000 which is typically not enough for most franchise start-ups.

Home Equity Lines of Credit

While home equity loans used to be a common method for financing just about anything they are all but a thing of the past. For those that can secure home equity lines of credit still they can be a relatively low cost method of funding your franchise. Home equity lines will typically cost 1% – 3% of the value of your home and interest rates ranging from 5% – 10% depending on your credit. If available a home equity line can be established in 30 – 60 days. All of this being said, securing a home equity line of credit is no easy task.

Bank loans

If you have a strong relationship with a local bank, you may be able to obtain a business loan. However, our funding partners have proven success in obtaining loans for franchises and businesses because that is their specialty. I encourage you to at least have a free consultation with one or two of our partners to compare options.

As a franchise consultant I have worked with countless entrepreneurs just like yourself to not only choose the best franchise for their goals, lifestyle and market; but to also explore and secure required financing. Please let me know if you would like additional information about any of these financing options. You can email or call 740-983-0779.

Funding options