How to Finance a Franchise With no Money
A franchise offers numerous benefits, from flexibility and support of an established enterprise to business independence. It enables the investor, the franchisee, to operate a business in its model and format. The company (franchisor) gives you a system and structure to run a business under their name, norms, and processes under a franchise fee.
Ideally, it is a more affordable way of becoming your own boss. However, opening a franchise requires a significant capital investment, including lots of hefty fees and costs. The average cost of financing a franchise in the US ranges between $10 thousand – $5 million, and generating such money can be a big hurdle.
Thanks to these tips, you can still finance a franchise startup with no money. Read on to understand the various ways you can finance a startup with minimal to no capital!
Most franchisors offer a hand to new investors looking to venture into their franchises. They understand that some potential investors may not have the capital needed to start a franchise. Some have idle resources that could help investors get started. If you have a particular brand in mind, you can check it offers franchise funding.
Most franchisors have financing options for both new and existing franchisees. This type of funding is a win-win for both the franchisor and the franchisee as the franchise keeps growing with the franchisee getting the capital needed to venture.
Franchisor funding can be in different forms. Some franchisors offer cash assistance while others lend equipment. Some franchises provide incentive programs for groups such as veterans, minorities, and people with disabilities.
To finance franchisees, corporations have tailored solutions such as lender partnerships or even direct financing.
Commercial Bank Loans
Traditional bank loans can help finance a franchise startup. Banks and other alternative lenders offer term loans upfront, which you can pay over a period of time in monthly installments. Most banks require to visit their branch in order to receive this type of loan. In order not to spend much time getting to the central office of the bank in your city or town, you can easily find banks near you and check if they provide commercial loans service.
After applying for a franchise, the bank review parameters such as business plans and personal credit history. These parameters help banks establish whether you can afford to repay the loan or not.
With a good credit score and a strong financial history, you stand a chance to get a bank loan. You also need stable collateral to secure the loan.
Commercial banks are more willing to finance franchise startups as they are backed by reputable business models. If bank financing is an option, ensure you have a high credit utilization of under 30%. Also, have a good to high credit score (ideally from 670-850).
Small Business Administration (SBA) loans can come in handy if you don’t have enough money to finance your franchise. The SBA is a government entity that was set in place to help business startups with credit guarantees so they can access financing. While this model does not dish out money, it provides a guarantee on loans provided by lenders such as credit unions and banks.
While individual businesses find it hard to access SBA funding, franchises have the upper hand. This entity understands the franchisor’s business model, hence easy funding for potential investors.
SBA loans allow long repayment periods and low-interest rates. The best option for franchisees is the SBA 7(a) loan that provides up to $5 million with repayment stretching up to 25 years. This option has a competitive rate based on the amount and duration.
The CDC/504 loan option is a handy option as well. It can fund your startup costs up to 90%, leaving you to contribute as little as 10%. Getting an SBA loan as a franchisee can be easier than securing a commercial bank loan. However, the process is time-consuming and can take months before approval and funding.
401(K) Business Financing
You can tap in your retirement accounts such as the IRA and 401(k) to fund your franchise startup. Also known as Rollover as Business Startups (ROBS), this process involves drawing your accounts early for investment with the ROBS plan in such a way to avoid penalties that come with the premature drawing.
Normally drawing your retirement accounts attracts penalties, but these may be avoided through ROBS. All you need is a retirement plan, either 401(k), IRA, or 403(b), to qualify for the ROBS plan.
The ROBS plan is a great option if you don’t want to use your property as collateral. With a retirement plan, you can create a new C-Corp and retirement fund. Funds from the existing retirement account are rolled over into the new account, giving you access to cash needed for financing the franchise.
Pull Equity from Your Home
Do you own a home? If yes, you can use it as collateral to generate money for your franchise through a home equity line of credit or home equity loan.
With a home equity loan, you can borrow about 70-80% of the equity available in your home. The downside with this loan is that your home can be seized if you default.
The equity line of credit gives you a fixed line of credit backed by your home’s equity. You can withdraw funds from the line of credit over a set period, usually one year. Once this period ends, you enter the repayment period. After repayment, you start drawing again since this is a revolving credit.
Friends and Family Equity
If you want to start a franchise with no money, you can seek financing from your family or financing. Family and friendly loans come at a good price and flexibility, if not for free. On the downside, these loans can break family ties and even formidable friendships.
You can still start a franchise with no money through strategic partnerships. Investors are all over looking for ways to invest, and all you need is to pitch your idea and business plan for financing.
Consider finding partners with money they can invest in your business. However, with this route, the franchise becomes co-owned. The rule of the thumb is to give your co-partners at most a 30% ownership deal. Draw a solid agreement that puts you as the dominant player in the partnership.
The Bottom Line
It’s possible to finance a franchise with no money. The above options will help generate the money needed to cater for startup costs and fees.
What is the Cheapest Franchise to Start?
Based on startup costs and fees, the cheapest franchises include Jazzercise, Cruise Planners, Dream Vacations, and Help-U-Sell Real Estate. Cruise Planners costs as low as $2100 while Jazzercise goes for around $2500. Cheaper franchises tend to be competitive and may have low revenues.
Are Franchises a Good Investment?
Franchises are a good investment. The business model is backed by the parent organization that most likely has a good reputation and an established customer base. Franchises may be costly to set up but perform much better than independent businesses.
How Much Do Franchise Owners Make?
The profit margin depends entirely on the type of business. High-end franchises such as McDonald’s and KFC make huge profits. With a franchise in a good location, you can make decent profits.