FUNDING
Our clients often ask us what are the best funding options for them or if they can even afford to invest into a franchise. Franchises are available at different investment levels. We can help you determine which funding option is best for you through our extensive network of funding companies. These companies specifically work with franchise companies and have a good understanding of the various business models and investment requirements. Below are some various methods we have seen investors use to secure financing, this is primarily a top-line overview and not an all-encompassing list.
401k Rollovers
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 as little as a few weeks.
SBA Loans
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. While SBA loans can be secured for most any reasonable business venture, the SBA maintains 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. 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.
Unsecured Loans
Often referred to as a “signature loan” and unsecured loan is simply a loan that’s extended to a borrower based on their good credit and requires no collateral. 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.
Home Equity Lines of Credit
For those that can secure home equity lines of credit they can still be a relatively low cost method of funding your franchise. Home equity lines will typically cost 1% – 3% of the value of your home (this can change/fluctuate). If available a home equity line can often be established in 30 – 60 days.
LEGAL
Part of the Franchise Due Diligence process involves receiving and reviewing the Franchise Disclosure Document or FDD. The FDD is the Federal Trade Commission (F.T.C.) mandated disclosure document that gives you a wealth of information about the franchisor. The form and composition of the document is standard with any franchisor and must include information on a variety of topics of interest to you to assist you in making an informed business decision. The major subject areas include:
- The history of the franchise and its officers and directors.
- A complete description of the business to be franchised.
- All costs and fees that you will be subject to under the agreement.
- The obligations of either party to the other during the term of the agreement and thereafter.
- Any relevant litigation history of the company or its officers.
- Any business failures, ownership transfers, franchise agreement terminations or other potentially adverse information relating to the success rate of the existing units in the system.
- Audited financial statements for the franchise company for the previous three years.
- A list of the existing franchisees.
You will carefully review the FDD and note any questions or issues that the material raises for further discussion with the franchisor. You may also choose to involve outside legal advisors, we can help refer you to Franchise Attorneys who will assist you in understanding information you may not be familiar with.
Interested in exploring your options in franchising?
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