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Starting a business requires money—sometimes a little and sometimes a lot. With a franchise purchase, though, there are advantages. The franchisor sometimes provides financial assistance directly along with the support needed to get your franchise up and running.
However, normally, you will need funds to cover the franchise purchase, build out (for retail locations), inventory, and other operational start-up expenses. Plus, the franchisor might require that you have at least a year’s worth of capital to cover expenses as you build your revenue.
Unless you have oodles of cash, you will need to find a way to fund your franchise. And you’ll need to have the money lined up before you open your doors. So, once you choose your franchise, get working on a solid business plan, and consider these sources of funds:
Friends and Family
Most business support comes from family partners. From running the operation to loaning money, family and friends rally behind their own. As with any funding source, it is important to write up agreeable contracts, even if there is no interest or longer terms. It is important to treat every person as part of a business arrangement to avoid future confusion or disagreements. Family is no exception, even if they are very generous and supportive. It can be a touchy arrangement that deserves special care.
Don’t forget that the franchisor has every reason to support your success. In many cases, franchisors will help you financially as you expand their franchise brand. In-house financing options will vary considerably by franchisor, but it is worth considering and comparing to more traditional sources. Often, it is easier, too. If a franchisor has found you suitable as a franchisee, they want to make you successful.
In the USA, Small Business Administration loans are available through traditional lenders, but the SBA helps you qualify for those loans. As a government entity, it guarantees portions of loans for approved franchises, making you a better risk in the bank’s eyes. That gets you lower interest rates and better terms than you can find on your own. In Canada, a similar program exists under the Canada Small Business Financing Program. Both are designed to promote business ownership and economic stability.
Traditional Banks and Lenders
Most banks offer business loans for new franchisees, and every aspect of the loans are based on how risky the bank considers you; your creditworthiness determines your loan structure. If you have excellent credit and offer collateral, the bank will consider you a better risk than another applicant. Also, a commercial loan for a franchise often works in your favor. The banks understand that a franchise is part of an established business rather than a start-up. The risk to them, then, is lower.
If your credit is less than stellar or you need a quick cash infusion, you can research other options. It is possible, for example, to borrow against your investments or 401k balances if you have them. The loan cost (fees and interest rate) is higher and the term is shorter, but if you determine that starting your franchise will provide a quicker return than your investments, it is a viable option.
There are several ways to find the financial support you need to start your new franchise. Every prospective franchisee has different needs, too. Work with your franchisor to review the best alternatives to kick-start your franchise journey.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.
This content was originally published here.