A franchisor looks at three things before granting a potential franchisee a business to open; 1) industry/business experience 2) marketing capabilities 3) access to capital. Most potential candidates have two of three items but mainly lacking the “access to capital” option. The cost to open most franchises run from $50,000 to $200,000 with the highest reaching $5 million depending on segment and franchise brand.
Only few people readily have that funding available to finance the launch of their franchise business so many may have to look for additional funding sources other than their back pocket.
Here are five funding sources to finance a franchise if your wallet is a little thin.
1. Business partners
There is a popular saying; two heads are better than one. One benefit of a business partner is they could help fund the franchise business. This partner can come as an angel investor or a business partner that has the deep pockets and the skill set to help get the company off the ground. Once a partner has been identified, make sure all the proper paperwork has been drawn up and signed (i.e. Operating Agreement). In addition, make sure expectations are established such as the roles of each partner, the percentage of ownership and profit sharing to avoid future problems.
2. Banks and credit unions
Banks and credit unions are commonplace for new and existing businesses to obtain funding. They typically have the best rates but will require a lot of paperwork such as a business plan, detailed financials, first born etc. Lastly, if approved a 20%-30% down payment will be required.
If having trouble with traditional banks, try credit unions. They could be a little more lenient because they rely on strong relationships.
3. Franchisor financing options
This source should be a franchisee’s first option but most people never think to ask their franchisor. They feel asking for funding paints them in a negative light, that they lack the ability to fund or manage a franchise well.
The irony is that most of these franchisors offer debt financing that could help fund the new business. If the franchisor doesn’t directly offer debt financing, many partners with financing institutions that do and they would be happy to refer new clients to those institutions.
The financing options are similar to traditional banks but they do have flexible options as well such as interest only payments with a balloon at the end and financing plans for leasing equipment and working capital.
4. Borrowing from friends and family
Another source of funding a franchise business is asking family and friends for a loan. We call this “dumb money” — main reason is because it’s coming from unsophisticated investors at a very early stage which could be extremely risky. Not a recommended source, but sometimes you have to. With this source, there are flexible payment plans that can be suited to franchisee’s business strategy and it would also be easy to adjust the payment plan whenever finances change.
5. Stocks and bonds
It is always a good idea to invest in stocks, bonds, mutual funds, and even a retirement plan because of situations like these. Now that there is a need for funding a franchise venture, hopefully the portfolio that has been invested over the years has amassed some type of fortune that would come in handy. Yes, a person can use their very own investment portfolio whether is stocks, mutual funds, IRA, or a 401(k) plan, as a means to help open a franchise.