Franchise Financing: How to Fund Your Investment
The path to franchise ownership might seem steep if your capital doesn't quite match your ambitions. However, it's crucial to understand that a lack of immediate funds shouldn't deter your entrepreneurial spirit. Let's explore why you shouldn't be discouraged, the normalcy of seeking loans, your franchise funding options, qualification criteria, steps to secure funding, and what you might expect in terms of borrowing capacity.
Don’t Be Discouraged
Firstly, it's important to recognize that when you’re learning how to start a franchise, many successful franchisees started where you are now: eager but financially hesitant. The franchise model is designed with support systems that often include assistance in franchise financing. This is because franchisors are invested in the success of their franchisees; your success is their success. Moreover, the existence of numerous financing options tailored specifically for franchise funding signifies that it's not only common but expected that franchisees will seek external financing.
Is It Normal to Borrow Money?
Absolutely. Taking out a loan is a standard practice in the franchise world. It's a viable and often necessary step toward achieving your business goals. Recognizing franchise financing as a normal part of the process can alleviate some of the stress and stigma associated with borrowing.
Am I Qualified?
Qualification for franchise financing varies by lender and loan type. Generally, you'll need a good to excellent credit score, a solid business plan, and some form of collateral. For SBA loans, specific eligibility requirements must be met, including being a for-profit business and operating in the U.S. Demonstrating experience in the industry or a strong managerial background can also bolster your application.
Funding Options
When it comes to franchise financing, several avenues are available:
- Franchisor financing. Some franchisors offer partial financing directly through the parent company, but more commonly, they partner with third-party preferred lenders who are familiar with the brand and willing to administer loans to qualified candidates.
- Personal assets. Savings accounts, severance packages from previous employers, and home equity and retirement savings plans are sometimes used to help finance the purchase of a franchise. You must be careful when leveraging these assets, however, so you don’t find yourself over-extended.
- Rollovers as business startups (ROBS). ROBS are a method of withdrawing money from a 401(k) or other retirement savings accounts to fund a new business without incurring penalties. Although completely legal, this approach may attract closer scrutinization from the IRS, so you must be sure everything is done to the letter of the law.
- Commercial bank loans. Prospective franchisees can apply for a commercial business loan with the bank of their choice. Bear in mind that approval typically depends on a good credit rating and detailed business plan. Some of these loans also require an upfront deposit and come with varying interest rates and installment terms for repayment.
- Small business association (SBA) loans. SBA loans are similar to bank loans except the SBA guarantees a portion of the loan amount, making them more attractive to lenders. SBA loans can also be easier for small businesses to get and often have better rates and terms than loans from a bank. Many reputable franchises are approved by the SBA and included in their official Franchise Directory, including AdvantaClean.
- Alternative lenders. These may be an option if you are unable to secure a commercial or SBA loan. While the approval process is faster and less stringent than that of traditional lenders, the interest rates will likely be higher and the repayment periods shorter.
- Friends, family, and crowdfunding. For those who lack capital or have less than stellar credit, borrowing from friends and family may be an option. Just be mindful of personal and professional boundaries; it’s advisable to set clear terms and contracts that are fair to both parties. With crowdfunding, investors will expect to receive early access to products and services, shares in the company, and other perks in exchange for their investment.
Steps to Getting Funding
- Research: Understand the different financing options available and which best suit your needs.
- Prepare your business plan: A comprehensive business plan is crucial for lenders. It should detail your business model, market analysis, financial projections, and how you plan to use the funds.
- Check your credit score: Your creditworthiness plays a significant role in securing financing. Ensure your credit report is accurate and work on improving your score if necessary.
- Explore franchisor financing: Contact your franchisor to learn about any direct financing options or preferred lenders.
- Apply for loans: Approach multiple lenders to compare offers. For SBA loans, use the SBA's Lender Match tool to find lenders that offer SBA-guaranteed loans.
- Negotiate terms: Once you receive loan offers, negotiate the terms to ensure they meet your business needs.
Expected Borrowing Capacity
The amount you can expect to borrow varies widely depending on the franchise system, your financial situation, and the lender's terms. For small to medium-sized franchises, SBA loans can provide up to $5 million, with most franchisees borrowing between $100,000 and $500,000. The total investment required for your franchise, including franchise fees, startup costs, and working capital, will dictate your borrowing needs. It's also worth noting that lenders typically require a down payment, which can range from 10% to 30% of the total loan amount.
Make the Best Investment with AdvantaClean
AdvantaClean provides financing of up to $32,000 to qualified candidates. In addition, your investment grants you access to a thriving home services franchise with exceptional training, ongoing support, and marketing assistance to run your business. To learn more about the AdvantaClean franchise, inquire now.