Are you ready to ditch the traditional 9-to-5 and become your own boss using a tried-and-true business model? Is it your turn to become one of over 700,000 franchise owners? You’ve done your research, and you’re ready to put in the work as a business owner. So, what’s stopping you from buying your own franchise? If you’re like many other aspiring entrepreneurs, one big challenge is holding you back. It’s the dreaded F-word: funding.
While buying a franchise is typically less expensive than starting a new business from scratch, there are still one-time and ongoing costs that rack up before you even open your doors to customers. Franchise fees, insurance premiums, inventory, equipment, business licenses, and royalty payments are just a handful of the costs associated with franchising. With initial franchise fees alone costing tens of thousands of dollars, the average person isn’t in the position to simply write out a check or withdraw funds from their own bank account.
The good news, though, is that there are financing options out there that help with the financial burden of business ownership. And even better, many of these options have low interest rates and favorable repayment terms, so purchasing a franchise is more affordable. You may even be able to tap into funds that you already have access to.
In this article, we’re going to explore seven ways to purchase a franchise when you don’t — or think you don’t — have the funds to do so. From government-backed loans to penalty-free withdrawals from your retirement account, we’re going to take an in-depth look at the funding options that can get you on track to buying your own franchise.
One of the most appealing benefits of buying a franchise is that sometimes you don’t have to look very far to get financing. In fact, many franchisors across various industries offer financing options for new and existing franchisees. Franchisor financing is a win-win for everyone: the franchisee gets needed capital while the franchise continues to grow with the addition of new locations.
The amount of money and type of financing offered vary by franchise. For example, Weed Man provides up to $40,000 to franchisees that may not qualify for a bank loan. The UPS Store also offers a low-interest financing program to qualified borrowers. Marco’s Pizza offers personal guarantees and assists franchisees in finding funding through sources including traditional and SBA loans.
Like other types of financing, you must be qualified to receive financial assistance through your chosen franchisor. Borrower requirements vary by franchise, but you should expect to have some funds to put into the business and meet any credit requirements.
If you want long repayment terms and low interest rates, a conventional loan fits the bill. Unfortunately, qualifying for this type of loan is difficult for any business owner — especially one that’s new to the game. The good news, though, is that the Small Business Administration (SBA) makes it easier for people like you to get business loans with competitive rates and terms.
The SBA itself does not distribute loans. Instead, this government organization provides a guarantee on loans provided by banks, credit union, and other lenders, known as intermediaries. Because a large percentage of each loan is backed by the SBA, it’s easier for franchisees and other small business owners to be approved.
There are several types of SBA loans for franchisees, but one of the best is the SBA 7(a) loan. With this loan, you may receive up to $5 million with repayment terms starting at 7 years and going up to 25 years. Funds can be used for a variety of purposes including commercial real estate, equipment, franchise fees, and other startup costs. Interest rates are extremely competitive and are based on the prime rate plus up to 4.75%. Rates are based on the amount and duration of the loan. Learn more about SBA 7(a) loans.
Another SBA loan option is the CDC/504 loan. With this option, a nonprofit Certified Development Company (CDC) provides up to 40% of the amount needed by the franchisee. A traditional lender, such as your bank or credit union, provides up to 50% of the amount. With this option, you could contribute as little as 10% to receive the funding you need.
There are more limitations on how CDC/504 funds can be used. While you can’t use funds to pay franchising fees, you can use this loan to purchase, expand, or update commercial real estate for your franchise. You can also use funds to purchase equipment for your business. CDCs can loan a maximum of $5.5 million with terms up to 25 years. Like SBA 7(a) loans, CDC/504 loans have very competitive interest rates based on the prime rate plus a markup. Learn more about CDC/504 loans.
Although qualifying for an SBA loan is easier than getting a conventional loan, the process can be time-consuming, taking anywhere from weeks to months for approval and funding of the loan. You must also meet all of the requirements for 7(a) loans and CDC/504 loans, including but not limited to having a solid personal credit score, putting up collateral, and meeting the guidelines of a small business as defined by the SBA. You should also be prepared to pay any fees required by the lender, including appraisal fees, service fees, and closing fees.
Home Equity Loans & HELOCs
If you own your own home, you could use your equity as collateral for a startup loan for your franchise. Equity is the difference between what is owed on the property and the value of the property. For example, if your home is appraised at $500,000 and you owe $300,000 on your mortgage, you have $200,000 worth of equity in the property that you could potentially leverage for your business venture. Equity is built up if your home value increases as well as when you pay down your mortgage.
With a home equity loan, you won’t be able to borrow the full amount of equity, though. Most lenders will only give you 80% of the value of your home, less what is still owed. Funds can be used for any purpose, including covering startup costs and franchising fees for your new business.
You may also consider a home equity line of credit, or HELOC. Instead of a lump sum, you have access to a flexible line of credit that is backed by the equity in your home. You’ll be able to withdraw funds as needed up to your set credit limit for a certain period of time. This is known as the draw period and usually lasts one year. After the draw period ends, you enter the repayment period. Since HELOCs are a form of revolving credit, you can reenter the draw period once you’ve repaid borrowed funds.
Competitive interest rates, long repayment terms, and flexible use of funds make home equity loans and HELOCs a good choice for covering the costs associated with buying and operating a franchise. On the flip side, though, your personal property is at risk if you default on your loan.
In addition to having equity in your home, you must also meet the other requirements of your lender. This includes having a high personal credit score, a low debt-to-income ratio, and a solid repayment history.
Rollovers As Business Startups (ROBS)
Another way to get the money you need to buy a franchise is by using funds you already have in your retirement account. Normally, drawing from your account early results in penalties. However, you can avoid these penalties and access your funds in just weeks with a Rollovers for Business Startups plan, also known as ROBS.
Instead of borrowing from a lender, a ROBS plan allows you to use your own retirement funds to start your own business. A new C-corp is established, and a new retirement fund is created. Funds from the existing retirement account are rolled over into the new retirement account. These funds are used to purchase stock in the C-corp, giving you access to the cash you need to build your business.
Qualifying for a ROBS plan is easy — you simply need a qualifying retirement account, such as a 401(k), 403(b), or IRA. You don’t have to worry about having a high credit score, a certain amount of income, or any other requirements needed for other types of funding. Because this isn’t a loan, you also don’t have to worry about paying interest to a lender. The downside, though, is that if your business fails, you risk losing your retirement funds.
While you won’t have to pay interest to a lender or penalties for the early withdrawal of funds, you will need to work with a ROBS provider. For a one-time setup fee, a ROBS provider can help you set up your C-corp and retirement account. You may also need to pay a monthly fee to cover maintenance and reporting on your account.
Ready to leverage your retirement funds to buy a franchise? Learn more about how ROBS can help you launch your new business.
The internet has made it easier than ever to shop for loans to purchase a franchise. Unfortunately, as a startup, you might find it difficult to find a competitive business loan. Lenders evaluate risk by looking at factors such as your personal and business credit profiles, annual revenues, and time in business. If you haven’t yet launched your business or you’re in the very early stages, finding funds with favorable rates and terms can be a challenge.
One option you do have, though, is to take out a personal loan for business. When you apply, you use your personal information — personal credit score and history and annual income, for example — to qualify for funding. That loan can then be used to purchase your franchise or fund other startup costs.
If you don’t have the funds to purchase a franchise, consider bringing on someone who does and forming a partnership. A friend, family member, colleague, or anyone with money to invest can become a partner. Be aware, however, that forming a partnership means that you will be handing over partial ownership of your business. This means that you won’t be the only one making the decisions … or taking the profits.
When you find a business partner, make sure that you work with an attorney to draft all documents and agreements. Having the right documentation doesn’t just protect each partner; it also ensures you remain compliant with Securities and Exchange Commission regulations.
If you have some money in savings or another source of funding, shop around for lower-cost franchising opportunities. The big players — think, McDonald’s, Chic-Fil-A, and other established franchises — are typically the most expensive to purchase and operate. Instead, focus your sights on more affordable opportunities that will allow you to break into business ownership.
In addition to finding low-cost startups, you can also look for franchises that offer discounts to new owners. For instance, some franchisors offer discounts on franchising fees to women, minorities, or military service members and veterans. You can kick off your research by checking out our picks for low-cost franchises.
Even though buying a franchise is one of the easiest ways to dive into business ownership, finding the right source of funding to get your business off the ground can be a challenge. However, as you can see from the methods above, affordable funding is out there. The important thing is to research all of your options, get creative with your funding if you have to, and choose the option that’s best for your business over the long term.
Interested in learning more about owning a franchise? Check out The Step-By-Step Guide To Buying A Franchise for more information to help you get started.