Start Funding Discussions: How to Finance Your Franchise (Step 8 of 18)
You Need the Capital for the Business
This is like being pre-approved for a home loan before putting in an offer. You need to speak with someone who can tell you if there is a high likelihood of you getting a loan.
You don’t have to wait this long to start funding discussions, but if you have gotten this far you need to start them ASAP. Many people start speaking to funding partners the same time as when they start speaking to franchisors just to be sure they can qualify for funding.
SBA Loans
This is the most common way for franchise owners to start a business. They go through a bank to get an SBA backed loan. This requires a personal guarantee on the loan.
Cash injections are the amount of money a bank wants to see you invest before they will loan you anything. If you write a financial model that calls for $500,000 to break even, they will call that the “project cost”. The cash injection is a percent of this project cost. For established franchises, these can require as low as a 10% cash injection and for new franchises it can be as high as 30%. Most banks will require a 20-25% cash injection. Cash injections can not be debt which means no lines of credit or personal loans.
Brokers
You can use brokers who will help you package the loan and shop it around. Sometimes they can get you a better rate than on your own but their focus is on getting the deal done so they aren’t negotiating very hard. However, if they say they can get the loan done, they can get the loan done. They will speak with you and get you pre-approved for free but to engage their help, there is a fee of usually a few thousand dollars. Sometimes, this can be wrapped into the loan.
Banks
You can go to the SBA loan list and see the thousands of loans made for franchises each year. You can also see which banks loaned for which franchise brands. This means you can find the banks most likely to say yes to you and reach out to them directly. This will save you on the broker fees but you will have to put the package together completely on your own and if you are denied, you will have to start over again at another bank.
Link to the SBA Loan list: https://www.sba.gov/partners/lenders/lender-reports
Rollover for Startups (ROBS)
This program allows you to take a retirement account and invest in your own business. Then you can pay a dividend to your retirement account and capture the tax benefits of that account. This can be used for the entire investment or the cash injection since it is not debt. You have to use a custodian to ensure you aren’t breaking some tax law which means this comes with a monthly fee of $100-$300, depending on who you go with.
Other Credit Options
The last two major sources of funding are unsecure loans and lines of credit. Unsecured loans are available to those with great credit but come with high interest rates often in the high single digits or low double digits. Lines of credit can be against home equity, whole life insurance, or stocks. These options can not be used as a cash injection for an SBA loan because they are debt.
You need to start figuring out a funding source now
There is no point going too deep into this process unless you know you can fund the business. If you are using cash, a ROBS, or a line of credit then you know if you will be able to access the capital relatively easily. If you are using an SBA loan, you need to have a conversation with a banker or a broker to see if you have a high chance of being funded.
