Not everyone has tens of thousands of dollars in their bank account, waiting to invest in a franchise.
If that’s the case for you, don’t think you can’t own a franchise just because you don’t have the start-up capital yet.
You have many options when it comes to franchise financing.
To find out what works for you, ask these questions to get started.
1. What is my budget (both business and personal)?
Of course, you know how much the franchisor will ask for from your initial franchise fee. But you need to budget for business expenses like real estate leasing, business licensing, overhead, inventory, and payroll.
Remember, your budget should also cover your salary and plan for unexpected expenses.
There’s no guarantee that you’ll make a profit in the first few months after starting your franchise (of course, your goal should be to break even),
So make your budget for the first year and include any expenses you will pay yourself.
The last thing you want is to invest too much and then run out of money, forcing you to sell or close your franchise.
2. What is the estimated time to make a profit?
While there is no exact timeline for becoming a profitable business, you can get an idea that it will take less time than other franchisees have experienced.
Talk to as many people as possible so you can tailor your finances accordingly.
You will be locked into business debt for the foreseeable future, and you must succeed.
Take the time to evaluate your options and compare banks or loan programs to ensure the option you choose meets your needs.
3. What is my worship like?
If you have a good credit score, you should have no trouble getting approved for a small business loan.
If your credit isn’t great, start working on rebuilding it now so you can be in a good place in a year or two.
If you are considering a loan, gather all of your financial documents, including personal financial information, to ensure that the loan application is successful.
4. Do I have money in my savings?
If you do, great. If you don’t want to go into debt, start putting money aside now and see when you’re ready.
Also, consider taking out a temporary retirement loan, but only if you can commit to paying it off long before you plan to retire.
Learn More | Top 10 Profitable Franchises: A Guide to the Best Investments in Texas
5. What is my wealth?
In addition to credit and savings, one criterion a potential franchisor evaluates if you are quite good enough to be a franchisee is your net worth.
Net worth is the balance of your assets and liabilities over some time.
In the best sense, it’s the source of your wealth by reducing your debts.
This number tells franchisors how well you’re managing cash—and how well you’re managing your franchisor’s money.
If you have a high net worth, it tells the franchisor that you can be more careful about what prospects you are looking for, as they will want you the most.
6. What are my financing options?
Not every new franchisee has the money to fully build a new business, and even if they do, taking out a loan to save money is a great idea.
There are several financing options to consider depending on your credit profile.
Franchisor funding: Your first step is to ask your franchisor if they offer any internal financing.
Some may offer a portion of the franchise or cash to purchase or rent equipment.
Some may partner with a third party for franchisee payments. But don’t choose it automatically.
First, look at how interest rates compare to other loans before making your decision.
IRA/401(k) Business Financing: If you have retirement funds, you can invest in a small business or franchise from a retirement-qualified account without taking a distribution or taking out a loan.
If you have a traditional IRA, Keogh, TSP, SEP, 403(b), or 401(k), your retirement plan may qualify.
Line of Credit: Another option is to take out a line of credit at your bank. This gives you money when you need it, instead of getting a lump sum upfront.
SBA Loan: You may want to consider an SBA loan to finance your new franchise business.
The Small Business Administration (SBA) works with banks to offer lower interest rates to business owners and franchisees.
LEARN More | The Benefits of Owning a Superior Insurance Franchise
7. Do I want to give back to investors?
If you are looking to hire an investor to get a cash injection, understand that the investor will have equity in your company and therefore have a say in certain business dealings.
If you don’t mind having a partner, by all means, consider this route.
Either
If you want an investor with limited power, consider at the beginning of the conversation what you want to give up in control.
