Owning a franchise is a great way to start your own business and fully realize your entrepreneurial potential. Working for yourself can be rewarding and increase your growth potential exponentially. One of the most effective ways to begin your journey of owning your own business is by opening a franchise. Franchises have a number of benefits as compared to starting from the ground up. For those who are ready to take the first step, consider the following tips for financing your franchise.
Tips for Financing Your Franchise
There are a wide variety of costs when it comes to opening your own business so it’s vital to secure financing. Financial planning is crucial so it’s important to determine the amount of money you need so you don’t have to take on more debt than you need.
Small Business Loans:
This is the most common type of franchise financing. Small business loans can be up to $5 million with variable percentage rates. The money is guaranteed to the lender by the Small Business Association (“SBA”). There are even specialized SBA loans for franchise ownership that have fast turnaround times so you can get started right away.
Depending on the franchise you choose, some offer financing for new franchise owners. There are often incentives when it comes to fees and interest. If the franchisor doesn’t offer financing options, they may connect new owners with lenders. In either case, this information can be found in the franchise disclosure document (”FDD”), specifically Item 10. Item 10 requires a franchisor to disclose whether the franchisor, its agent, or affiliates offer financing arrangements to franchisees. In addition, the material terms and conditions of these arrangements must also be included.
A secured loan involves leveraging the loan against your own financial portfolio. There are a number of benefits to this type of loan as the interested rates are often lower, you can leave your portfolio alone as it continues to earn money, and you can still have enough to operate and quickly grow your franchise. There are risks so it’s important to talk with a financial professional for advice on whether this loan is right for your franchise.
Unsecured loans are beneficial for those who don’t have the necessary collateral, or who don’t want to assume the risk. The process can be really fast, but it’s best for those with high credit scores. You can often get financing from a credit union with a great interest rate.
If you are open to giving up some control of your business, angel investors are a great option. They are either individuals or groups of people that invest for partial ownership and a stake in business decision-making. If you are new to business and want some guided support, this may be a great option for you. Do your research and ensure your potential angel investors are the right fit for you and your business.
Financial Brainstorming and Planning
Before you consider financing options, run some numbers and get an idea of how much you need financially to get up and running. This is often easier with a franchise as compared to a new business as there are already established business plans in place. Most of the costs to start a franchise include fees. Franchise fees cover the cost of training, website creation, supervision, and other startup tasks necessary to get the business going. These are non-negotiable and can be paid in installments or most commonly, a lump sum.
In addition to franchise fees, regular royalty fees are a continual cost for franchise owners. The amount is often a percentage of your gross profits, but it can also be a flat monthly fee. Depending on your specific franchise, they may need to be paid weekly or monthly. Other franchise costs to consider include the following: bank fees, landscaping, insurance, lease payments, office supplies and equipment, professional services, licenses and permits, travel, contractor fees, and advertising and marketing.
Starting a franchise can be overwhelming without the help of a financial professional. If you are considering owning a franchise, or already own one, Indevia Accounting can provide comprehensive solutions to your business needs. They offer a wide variety of services that can help streamline your business practices. This can dramatically improve the short- and long-term success of your franchise. Contact us today to get started and see how your bookkeeping can improve drastically.