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Top Sources For Getting Funding for a Franchise
November 25, 2022
Like any other business, investing in a franchise requires money, and many people don’t have so much liquid capital ready on hand to get started. A potential entrepreneur may have the desire and the business plan ready to go, but getting funding for a franchise can be one of the biggest obstacles between them and realizing their dream.
Franchise funding is needed to cover a number of startup expenses which can include the franchise fee, equipment costs, inventory, or even the cost to purchase a franchise if going down the route of buying into a running operation. While there are certain franchises that can be started for as little as $5,000, the majority will cost in the region of $75,000-$150,000 to get going. If you’re interested in starting one but are worried about getting funding for a franchise, here we’ll look at 10 of the top sources for franchise funding you can turn to.
10 Top Sources for Getting Funding for a Franchise
1. Bank Loan:
The first place that most people think of for borrowing money is a bank, credit union or other financial institution. It’s their business to lend money to people who need it, so there’s always a proper system in place to assess your requirements and ability to pay back. The most common type of loan given out is called a term loan, which basically means that you are borrowing a set amount of money that will be repaid over a set amount of time. While the interest rate can be a fixed rate or variable, it is important to recognize how much you will be repaying over the loan. While a longer loan might be easier to pay off monthly, it will likely mean you pay more interest in total.
2. Grants for Franchise Business:
In order to help people out with getting funding for a franchise or other small business, there are a number of grants offered by private organizations and on a state and national level. These can include the SBIR and STTR grants, run by the Small Business Administration (SBA) to support small businesses, as well as available funding for certain groups like veterans and female entrepreneurs.
3. SBA Loans:
Along with administering the SBIR grants, the SBA also runs a program of backing loans for small businesses to get started. This can be a great way of getting funding for a franchise, as lenders will look more favorably on giving out money that’s at least partially guaranteed by the SBA. The loans can range from $500 to $5.5 million, and to find out more about applying for one of these loans, the terms, and their list of approved lenders, you can visit their site here.
4. Business Loan:
Whatever kind of franchise you’re looking to open or buy, a business line of credit is one of the most obvious ways of getting the funds needed. A business loan differs from a standard term loan in that your business will be the collateral for repayment. It’s therefore important to be able to demonstrate the financial forecasts and overall progression plan for your business to demonstrate your capacity to repay the loan. Your personal credit score will still be assessed as part of the application along with those elements, however, so bear that in mind.
5. Home Equity Line of Credit (HELOC):
When any financial institution is providing franchise funding, the most important thing for them is your ability to repay that loan. If you have your home owned outright without a loan or significant equity, you will be much more successful at getting funding for a franchise through a HELOC. However, there is considerable risk attached, as if the business doesn’t go well, it is your own home that is at risk of repossession.
6. Retirement Account:
Tens of millions of Americans have 401(k) pension funds which they may have been paying into for years. This is accessible capital, though it should only be used if you believe your investment can cover your retirement. To prevent people from cashing in their pensions too early, the IRS generally imposes a number of penalties for trying to use that money for personal investment. However, it is possible to avoid most of these using a Rollover for Business Startups (ROBS) scheme.
7. Franchisor Finance:
It might not occur to many, but another good source of franchise funding is to ask the franchisor themselves if they provide financing. This can work for both parties as the franchisor will have a very good idea of your prospects for success and will also be able to identify any issues that might be holding the business back and preventing the repayment of the loan.
8. Angel Investor/Business Partner:
You may have the personal drive and motivation to make your franchise succeed, but without the available finance, so one good way of getting funding for a franchise is to take on a partner. A silent partner who’s happy to let you get on with the running of the business is also known as an ‘angel investor’. This can be a great opportunity for someone who has capital but doesn’t know where to invest if they can find someone else who has a great business plan but lacks the cash to make it happen.
9. Social Circle:
While not necessarily angel investors, your friends, family and neighbors can be a good source of franchise funding if you’ve demonstrated you’re trustworthy and they believe you can succeed. It’s important to always approach these matters in a proper professional way, drawing up contracts and definite repayment plans. Many social relationships get torn apart by money, so make sure it doesn’t happen to you.
10. Equipment Loan:
If a large part of your franchise funding needs are taken up by equipment or machinery, it’s possible to seek financing for these from specialist equipment financiers. This can be a good way of getting funding for a franchise, as once you have your franchise fees, location and equipment, you may only need to cover your working capital to keep the business running.
Getting Funding for a Franchise
One of the biggest obstacles facing any potential entrepreneur is getting funding for a franchise. Fortunately, there are a number of options for franchise funding out there, ranging from traditional term loans from financial institutions to family and friends to angel investors. The important thing among all these is to ensure you have a solid business plan and have factored in your ability to repay whatever financing you receive.
If you’re interested in investing in a franchise that has no national competitor and one of the best renewal rates in the country, why not consider Screenmobile? As a family-run operation with decades of experience in the home improvement industry, we can help you achieve your dreams of business success. You can visit our dedicated website here or talk to our team to find out more.
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