Buying a franchise is a bigger investment than most people can afford on their own. Fortunately, there are a variety of financing options available. However, each of these options comes with certain risks and limitations, and prospective franchisees must think carefully about which option makes the most sense for their individual circumstances. An experienced franchisee lawyer can help you make an informed decision when it comes to choosing between options including:
1. SBA Loans
An “SBA loan” is a bank loan that is backed by the U.S. Small Business Administration (SBA). SBA loans are fairly common in franchising, as they provide prospective franchisees with access to the funds they need, they provide banks with guaranteed repayment, and they provide franchisors with access to more qualified candidates. Among other requirements, in order to qualify for SBA loans, prospective franchisees must choose franchises that are listed in the SBA Franchise Directory.
2. Conventional Bank Financing
If you do not qualify for an SBA loan, then another option may be to obtain conventional bank financing. Several banks provide business loans to prospective franchisees. However, as these loans are not guaranteed by the SBA, if your franchise fails you will be personally liable for repaying the loan.
3. Franchisor Financing
Some franchisors offer financing to new franchisees. You can find the terms of a franchisor’s financing (if any) in Item 10 of the Franchise Disclosure Document (FDD).
4. Private Equity
Private equity is another option, though most private equity funds focus on investing in large multi-unit franchisees. With that said, there are investors who invest their funds in first-time franchise buyers. Private equity avoids the risks of defaulting on a loan; but, as you might expect, it comes with other strings attached.
5. Veteran Financing Programs
If you are a veteran, you may qualify for the IFA’s VetFran Program or one of several SBA programs that are exclusively available to military veterans. These programs offer financing, discounts and other incentives—so you will want to review all of the options and choose the one that best fits your needs.
6. Home Equity Line of Credit
If you have a significant amount of equity in your home, you may be able to obtain a home equity line of credit to finance your franchise purchase. However, since this puts your home at risk in the event that your franchise fails, it is an option that requires careful consideration.
7. Retirement Savings
Another option is to use your retirement savings to finance your franchise—although this too is an option that requires thorough evaluation and cautious decision-making. If you invest your retirement savings and your franchise fails, you could be left starting from square one.
Discuss Your Options with National Franchisee Attorney Jeffrey M. Goldstein
If you are thinking about buying a franchise and have questions about financing, due diligence or any other aspect of the buying process, we encourage you to get in touch. To learn about our fixed-fee franchise business review programs from national franchisee attorney Jeffrey M. Goldstein, please call 202-293-3947 or tell us how we can contact you online today.
