7 Ways to Finance a Franchise or Business

So you’ve decided it is time to be self-employed and that buying a franchise or business is the best route for you. If you’re feeling a little quesy right now, please remember, most business start-ups are financed and you’re not alone. If you’re planning on using financing, it is best to start looking at your finance options right away. Finding the right source, going through the application and approval process usually takes longer than expected.

1. Home Equity Loan

This is the quickest and usually the least expensive of the commercial-type loan options. If you have owned your home for awhile and have some equity getting a home loan is about a 30-day process. If you choose the line of credit loan, you can write checks as you need to pay for items. One thing you need to remember is to include your loan payment as part of you business expenses when figuring your projected financial statements.

2. Your Retirement Account

This form of financing is not widely known. There are companies that will legally convert those funds that are locked in a retirement account into an account to use for your new business. This option is not for those who are intolerant to risk since you are using funds allocated for your retirement and there is no guarantee that you will be successful and able to refund your account.

3. SBA Loan

The Small Business Administration has loans for financing new businesses. The SBA does not actually provide the funds, they provide the guarantee to the banks. They also create the loan programs and the criteria for the loan approval.

4. Your Family

What if you do not own a home but you have great credit? How about using the home of a family member as collateral for your SBA loan? Of course, now you not only need to convince the SBA that you’re a good risk, you also need to convince your family member that you are going to be successful.

5. Asset-Based Lenders

If your business will include purchasing equipment and fixtures, an asset-based lender is an option. You probably will not be able to finance all your business expenses, like the franchise fee, but this is a way to reduce the amount of cash you have to invest at start-up. The assets of your business are the collateral for the loan. Be aware the the interest rate and costs for this option will be higher than a loan with real estate as collateral.

6. Sell Stock In Your Corporation

This option takes some extra effort because you need to convince potential investors that your business will be a big success. You will also have to hire an attorney to incorporate your business and make sure you are following the law in your sale of stock. Your business plan and projected financial should be very compelling, yet realistic, so that your potential investors will be excited to invest.

7. Build Business Credit

This is probably the best option, but of course, it takes the most time. This method involves setting up a corporation or LLC and then slowly building the credit profile of the business - just like you started out building your personal credit when you were 18 years old.

Some of the huge advantages to this are you’ll be building your business credit completely separate from your personal credit so everything you do with you business credit accounts/loans will not affect your personal credit at all. Once you build your business credit, you’ll be able take out large loans or lines of credit (anywhere from $25,000 to around $1,000,000) bases solely on the good credit history of your business.

But of course all good things are not perfect. In order to go this way you’ll have to plan ahead and expect to take 9 to 12 months to build your business credit profile up enough to then apply for your money.

You can learn more and get help doing this through Dun & Bradstreet, B2B Credit, or Corporate Credit Concepts.

So these are just 7 of the most common options for financing your franchise. It is important to include your choice of financing in your decision to purchase a franchise or any business.