How can you fund your franchise ? What are the available options ?
(WHAT WE ARE WRITING HERE BELOW APPLIES TO NEW BUSINESSES. FOR EXISTING BUSINESSES IT CAN BE A BIT DIFFERENT)
First of all, to fund your franchise you can use your own funds :
- liquid cash,
- convert your assets into cash
- receive gifts from friends and family
- convert your 401K or IRA. There is a way to use these funds with no penality. You can find more information on these pages.
What are the benefits ? You don’t have to pay back a loan, so you have a better profitability from the get go.
Secondly, you can borrow money.
- Crowdfunding has become very popular lately. What is crowdfunding ? It is raising funds in exchange of parts of your company, typically via the Internet. We will develop this in the future.
- Or/and you can go the more typical routes, a.k.a. getting a loan.
To be able to borrow money, you need first of all to have a good credit score, typically over 680. The better your credit score is and the best interest rates you are going to get.
However, your local bank is unlikely to fund your franchise. There are some small financial institutions that will fund your business for a good interest rate, provided you have some collateral, for example your home. In the same line you could get a HELOC (Home Equity Loan). However if your business fail, you will end up losing your home as well.
A better option to fund your franchise is to get an SBA loan. An SBA loan is guaranteed by the government, so if your business fails, you don’t have to pay back the loan. If you are starting a new franchise unit your chances to get an SBA loan are much higher than if you start a business from scratch. Also some franchises are already pre-approved, so you can get the SBA loan much faster. However you need to provide at least 20% of liquid capital of your own.
Or you can get unsecured loans with some specialized financial institutions. The interest rates are much higher than for a conventional or an SBA loan, but typically you can get approved fast. If you have a business that ramps up quickly, this can be a good option.
Note : If you are looking to come to the US, start a new franchise unit and get an E2 visa, your only options are having enough cash or getting a loan in your country of origin up to 80% of the investment needed.