With the growth of franchising over the last couple of decades, new financing options have entered the picture as well. Securing access to capital is a critical first step for many franchisees, but it is a step that must be taken cautiously and with a clear understanding of the risks and implications involved. Buying a franchise is a risky venture already, and as a franchisee, you need to choose a financing option that does not unnecessarily or unreasonably enhance your risk of facing bankruptcy in the event that your business is unable to turn a profit.
In no particular order, the following is a list of many of the traditional and newer franchise financing options that are available:
1. Conventional Business Loans
One of the most popular options for franchise financing continues to be the conventional business loan. Why? These loans are well-known, and financing is available from sources ranging from global financial institutions to niche lenders specializing in the franchise industry.
2. Small Business Administration (SBA) Loans
A Small Business Administration (SBA) loan is a conventional loan backed by a guarantee from the SBA. Lenders like guarantees, and the American Recovery and Reinvestment Act allows the SBA to guarantee as much as 90 percent of the amount financed by a franchisee. While SBA loans are potentially available for all franchise opportunities, there is an SBA Registry which lists franchise systems that are preapproved for guaranteed lending.
3. Franchisor Financing
Some franchisors offer financing of initial franchise fees and certain other franchise-related expenses. Financing details must be disclosed in Item 10 of the franchisor’s Franchise Disclosure Document (FDD).
4. Private Investment
Whether by taking on a business partner or securing venture capital, private investment is an option that may be available to some new and existing franchisees as well. As with all forms of financing, the documentation surrounding any private investment must be carefully drafted and negotiated.
5. Retirement Funding
Using retirement assets is another option for financing a franchise acquisition, though it is one that should be undertaken only with thorough planning and the advice of a knowledgeable financial advisor. Penalties may apply, and if you decide that pulling from your retirement funds is the best option, you will want to make sure that you take all of the necessary steps to preserve your nest egg as much as possible.
6. Home Equity Line of Credit
If you made a large down payment or have accumulated significant equity in your home, you may be able to secure a home equity line of credit for your franchise. Similar to relying on retirement savings, relying on the equity in your home for a franchise opportunity requires careful consideration with the help of experienced advisors.
Can you crowdfund a franchise? Potentially, yes. Crowdfunding is one of the newest options available for financing business ventures, and some platforms are now offering services specifically focused on connecting investors with prospective franchisees. Depending on the platform you choose, both debt and equity financing options may be available, and it will be critical to make sure you fully understand the implications of crowdfunding your franchise opportunity.
Contact the Franchise Attorneys at the Goldstein Law Firm
At the Goldstein Law Firm, we bring more than three decades of experience to advising new and existing franchisees on financing arrangements and other franchise-related legal matters. If you need help understanding or evaluating the terms of a proposed financing arrangement for your franchised business, call 202-293-3947 or request a free initial consultation online today.