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Franchise Financing 101

During this week’s blog edition, we’re going to take a look at franchise funding 101. It won’t necessarily apply to those franchisees who already have funding in place, but you may still learn something beneficial. If you do happen to be a prospective franchise shopper, brush up on your finance skills and put some of the following knowledge in the proverbial bank.

The selection and investigation process (also called “discovery”) in franchising is probably considered the “fun part.” You get to review, preview, winnow down and select a franchise concept from over 3,000 different choices and categories. Imagining how you would run a business of your own can be an exhilarating exercise. Once completed, you hear, “…now let’s get down to financing.” And then the smile completely disappears from your face.

It’s a lot like a trip to the new car lot, isn’t it? Once you get past the make, model and color choice—and the exhilarating test drive—it’s time to discuss your finance options. The goal with this step in the process should primarily include a strong understanding of your options. Where will the money come from? A bank? Credit union? 401(k) rollover plan? Your rich uncle who wants to see you succeed? What type of interest rate are we talking about? Are there any breaks at all to be cut here?

Let’s begin with a bird’s eye view which is unabashedly unbiased. The U.S. Small Business Administration is an excellent place to begin. It even includes basic overview resources that you should probably take the time to read before you’re ready to discuss financing your chosen franchise concept. Once you’ve finished there, cruise on over to their advice on financing a small business or franchise. You can even find out if you qualify for any incentive-based programs, such as ones designed to benefit veterans.

You should understand that SBA loans are partially guaranteed by the U.S. government, meaning less risk is involved. Standard SBA franchise loans are deemed 7(a), issued by a bank or other qualified lender, and partially guaranteed against default. Many franchise consulting companies offer their own financing options to you via partnership agreements they have in place. They operate much like General Motor’s Ally Financial program does for new and used car buyers. 

Your franchise business plan will have a lot to say about the repayment of your small business loan. As a rule, most prospective franchisees will be expected to put a down 20 percent of the total payment from personal liquid funds—much like a new home purchase.

An alternate franchise finance route that is quickly gaining in popularity is the retirement fund rollover option. It may make sense to tap your 401(k), Individual Retirement Account (IRA) or other retirement funds rather than seek a loan. Rather than taking an early withdrawal, which may be taxed, you can consider setting up a C-corporation which will own and operate the franchise. Then roll over money from your self-directed retirement account into the C-corporation’s profit-sharing plan and direct those funds be invested into the franchised business. While this sounds mutually beneficial to you and your franchise, it doesn’t come without risk, so seek the opinion of your personal accountant or tax expert prior to going this route.

To close this discussion, one needs to go back and read the final sentence of the previous paragraph and take heed. All forms of franchise financing come with risks. Finding the best possible route to mitigate that factor is the single most important consideration.

Choose wisely.

As a franchisor, you’ll want to know which existing and potential franchisees best fit your business concept. And Proven Match is the proven solution in determining those factors. Obtain the ability to categorize your best existing franchisees for future validation efforts. And find the potential franchisees still engaged in the discovery process to add to your team. Through our proven behavioral assessment techniques, predictive analysis becomes predictive success for your franchise concept. If you’re ready to show your leadership by getting started, give us a call and we’ll put you on the path to a more productive year in 2016.

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