From a technical perspective, franchising is merely a marketing maneuver that can be used to expand an established company and/or, to generate additional working capital. At its bare bone basics, franchising is a business arrangement between an existing company (i.e., the ‘franchisor’ or ‘licensor’) and its new business colleague (you — the ‘franchisee’ or the ‘licensee’) that is defined by a legally enforceable binding contract (i.e., the ‘franchise’ or the ‘agreement’). A franchise is a business arrangement between at least two parties –
- The Franchisor— is the existing business with an established brand or servicing trademark that seeks to expand its current business footprint and/or generate business capital.
- The Franchisee — is the new franchise-business that represents the brand or trademark, and in doing so, reaps the benefits of the well-known brand or trademark, for a fee of course.
There are two types of franchising arrangements— a traditional, Product Franchise or a Business Format Franchise. The Business Format Franchise provides franchisees a business package that includes products, services, trademarks, and operations, among other benefits. Examples of Product franchising can be found in the gasoline, bottling and automotive industries, to name a few. When you have done your due diligence and vetted out a franchise opportunity, it is time to consider the financial requirements in becoming a franchise owner. Generally speaking, there are two categories of business expenses associated with starting a franchise business:
- The Startup Costs — i.e. equipment, licensing fees, etc.
- The Operating Expenses — to fund the business during its first few quarters of operation.
Collectively these expenses are known as franchise business financing expenses.
How to Get Financing for a Franchise Business?
Preliminary, it is important to note that many franchisors offer franchisees financing options as part of its franchise purchase offerings. And while it is smart to review financing options, it would be even smarter to investigate other financing options that may offer easier access or reduced pricing. This is a great example of why Caveat Emptor is so important as a buyer. A few of these financing options are detailed below.
Financing a Franchise’s Startup Expenses Without Borrowing a Dime
Many franchise owners use their personal savings account to finance a franchise opportunity’s startup expenses. These noted savings accounts could be a simple savings plan, a liquidated money market fund, or retirement funds — like a 401K, to name just a few. Since the concept of borrowing began, it is pretty much understood that if you needed to borrow money, you simply paid a visit to the local bank. Lending institutions, for a very long time, were the only funding source for startup expenses and the financing for ongoing daily expenses of a new franchise establishment.
And while a visit to the local financier is still a popular and viable option, there are now many more ways to raise capital to cover the franchise’s initial startup costs. For those entrepreneurs who have a tidy retirement nest egg only generating passive income, it is feasible to use these earmarked retirement funds to fund a franchise’s startup costs — without paying any interest or incurring any penalty. Let’s learn how to get financing for franchise business startup costs without fees and penalties.
Introducing the Rollover for Business Startups (ROBS)
Perhaps the most beneficial feature of using a ROBS transaction to cover the franchise operation’s fees and startup costs is the fact that a ROBS transaction is not a loan. A ROBS transaction is a nifty financial move that allows you to transfer the monies in your current retirement account (i.e. a 401K or other qualified retirement plan) to your new C-Corp’s professionally managed retirement account. The following steps detail how to get financing for a franchise business without interest charges and fees.
- Form a C-Corp for the new business. This is the only legal entity that permits a ROBS transaction.
- Create the new C-Corp’s qualified retirement plan/account. This includes hiring a custodial administrator to manage the retirement plan.
- Transfer current retirement funds to the newly created retirement plan.
- A trustee uses the retirement funds to buy stock in the new C-Corp.
- The money generated by the stock purchase becomes available to be used to pay for the franchise business’ startup expenses.
These steps, when completed consecutively and correctly are exactly how to get financing for a franchise business without interest or penalties. They can even be completed prior to starting a negotiation with a potential franchisor. Remember, that when you have funding in place, you negotiate from a stronger position and this; typically generates a more positive outcome.
Should the retirement monies that financed your franchise business run short, it is important to understand the owner of a franchise startup has the option to open a startup business credit card to help manage cash flow disruptions as the business overcomes its growing pains. However, when you have fully funded the startup fees portion of the required franchise business financing, a new franchise owner must then consider the amount of financing required keeping the new franchise business afloat during the lean early months/years.
Franchise Business Financing for Daily Operations
When the franchise contracts have been ironed out and the business location is ready to open its doors, it is more than challenging predicting how the franchise business will be initially received by the neighborhood and its surrounding areas. It is for this reason that a new franchise business owner must have ‘backup financing’ in place, ready to manage cash flow ebbs and flows until the business is up and running, and humming along.
Some of these additional franchise business financing monies are also used for marketing strategies, office supplies, and even the purchase of inventory. Franchise business owners in need of additional financing to help during the early years have several options from which to select. The following list of financing options offers franchise business financing options that provide quick & easy funding, and lenient lending guidelines.
- The Stated income Business Line of Credit— a line of credit that typically exceeds the limits offered by business credit cards. Another great feature of a line of credit is that the available funds are reusable. An applicant’s credit card usage should speak to proper financial management because a business line of credit operates similarly to a credit card. Credit histories with liens or bankruptcies usually preclude one’s ability to secure an approval.
- An Uncollateralized Business Loan— is more expensive than collateralized financing. Additionally, a business owner applying for an uncollateralized business loan must recognize that this type of business loan is only financially prudent for short-term financial situations.
- A Startup Business Credit Card— although a startup business credit card can be expensive, it is a viable business option when all other options fail.
During that time, Judi began contributing to financial education endeavors and authoring CEU coursework to meet state/ARELLO standards. Judi has held a mortgage broker's, real estate, NASD Series 6 & 63, and LCAM licenses during her career. Recently completed two terms as the President of the condominium where she resides.
She is a passionate photographer/videographer/artist - skills she chooses for a variety of business ventures. When not writing about facts and figures, she remains balanced through the practice of Reiki and kindness.
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