Jantize Funding Your Franchise
A complete guide for jump starting your franchise success.
Maybe it’s an idea for a new business that you’ve been nursing for years, and you’re finally ready to make it a reality. Or maybe you’ve found an existing business for sale that you are convinced you can make even more successful as its owner. Or, there’s a franchise operation that you’ve been watching and admiring, and now you’ve decided that you want a piece of the action. No matter which of these scenarios applies to your situation, there is one crucial common denominator: the need for funding. And just as businesses come in all shapes and sizes, so do the options for funding them. Based on your timeline, risk tolerance, credit history, and other factors, the best option for you might be a single solution or a combination of several options.
With so many options available for funding a new business, it’s more important than ever to ensure your funding strategy is appropriate for your individual needs. One mistake entrepreneurs often make is underestimating their capital requirements. As a result, undercapitalization remains one of the most common reasons businesses fail today. Many entrepreneurs believe they only need sufficient capital to cover their startup costs and open the doors, then after that their customers will keep them open and profitable.
Unfortunately, that is not often the case. Every new business has a “breakeven” point – that moment when the cash they receive as revenue is finally sufficient to cover all of the operating expenses. Until that moment, the business has to operate at a “loss”. There must be adequate working capital available to get the business to “breakeven” and beyond. Often that “breakeven point” is much further down the road than the owner anticipates and his or her resources are not sufficient to get him there.
Fortunately, today there are a variety of funding programs available to suit every entrepreneur’s unique funding needs. Understanding all of your options and the pros and cons of each is the first step in determining the best way to fund your business venture. The following pages detail several of the most popular options.
Franchise Funding Options
Using Your Retirement Funds
This program is similar to buying stock in a public company, except instead you’re investing in your own privately held company. A leading ERISA (Employee Retirement Income Security Act) attorney named Len Fischer (the founder of Benetrends Financial), pioneered this method of funding in 1983 to help small business owners maximize the benefits of their retirement plans. Thus, the very first IRA/401(k) rollover business funding plan called The Rainmaker Plan was born. Learn More at Benetrends.com
SBA Loans
The SBA’s mission is to help entrepreneurs start or grow their business, and an SBA loan may provide the longest-term and lowest-interest loan available for your business. The most common one for small business owners is the 7(a) program, which is more generally focused on helping small businesses start and grow. The SBA does not directly lend money to business owners. Instead, small business owners secure an SBA loan through an authorized SBA lender (such as a bank). Learn More at Benetrends.com
Conventional Loans
Conventional loans can be provided by bank and non-bank lenders, but are not guaranteed by the SBA or other government entity. Any small business or franchise can apply; however, they can be difficult to obtain for startup businesses. Approval depends largely on the overall credit risk of the business. With conventional loans, the interest rate, term length, and loan amount depend on your credit rating and business revenues.
Securities Backed Line of Credit
This type of loan is backed by securities held in an investment portfolio. It is similar in concept to a home equity loan, but rather than the loan being backed by the equity in your home, it is backed by the securities held in your investment portfolio. Whether you want to launch a new business, expand one you already have, or utilize a bridge loan, this type of funding can provide you with the immediate funds to do so by allowing you to collateralize your investment portfolio, without disrupting your long-term investments or asset allocations or creating unexpected tax consequences. Find Your Loan at Benetrends.com
Home Equity Loans
Although becoming less common, some entrepreneurs still rely on their biggest asset for cash – the equity in their homes – to finance a franchise or business purchase. Home equity loans remain relatively easy to obtain, assuming you have the required equity in your home, as well as good credit and income for repayment – but the requirements have tightened up recently. There are two types of home equity loans: a standard home equity loan that is just like a regular mortgage in that you borrow a single lump sum and repay at a fixed monthly rate; and a home equity line of credit (HELOC), where you have access to borrow smaller funds—when needed—up to a predetermined fixed amount.
Now that you know what your options are for funding, it is equally if not more important to fully plan and integrate a funding strategy appropriate for your individual needs. There are many things to take into account when planning your short- and long-term funding strategy:
• Are you a first-time business owner or a multi-unit operator?
• Do you have the cash necessary to cover the capital injection needed for most loans?
• What are your short-term and long-term goals?
• What is your exit strategy? How long will you own the business?
• Are you buying an existing business vs. a startup?
All of these variables factor into determining the most appropriate funding strategy for your unique situation.
Special Strategies for First-Time Business Owners
Taking into account all the costs needed to start a business, most potential business owners find they don’t have the cash resources to purchase a business or franchise upfront without some sort of additional funding. If you find yourself in this position as well, don’t be surprised if you run into a few financing challenges. Many lenders are typically more hesitant to approve loans if you don’t have experience or a solid track record as a business owner. However oftentimes this is overcome for franchises since the bank will overlook this for relevant experience as it relates to the franchise. Having said that, it’s not impossible. Following are some special strategies and tips for first-time business owners:
SBA loans: While the SBA loan process can be overwhelming and complex, there are steps you can take to eliminate hurdles and better ensure approval. For example, there are funding partners (like Benetrends) who monitor what concepts, types of borrowers, FICO score, collateral, and assets lenders are looking for and can help you apply only to the bank(s) that would be the best fit for your situation. This ensures you avoid the banks that have little or no interest in your loan application, thereby increasing your chances of a quick and painless approval. It also provides you with the opportunity to secure offers from multiple lenders so you can choose the one with the best terms.
Using your retirement funds (ROBS): If you have more than $50,000 in a 401(k), IRA, or other qualified retirement plan, this might be a great option for you. There are no penalties or upfront taxes, and because it eliminates the need for a loan, your business becomes cash flow positive sooner. It also provides you the ability to pay yourself a salary until your business becomes profitable, and can be used to cover your personal expenses so your business only needs to cover business debt.
Combination of options: Many times, using more than one funding option could be your best strategy. For example, using the Rainmaker plan as the capital injection for an SBA loan is becoming more and more popular. A funding expert can help you decide if using a combination of options is right for you.
Avoid insufficient funding: One of the most important things for first-timers is to avoid starting out undercapitalized (one of the leading causes of business failure, according to the SBA). You can do this by estimating realistically for working capital and by leaving enough of a buffer to help with unexpected costs.
For franchises, start with the franchisor: If you are interested in purchasing a franchise, one good place to start for securing funding is with the franchisor, since they may already have a relationship with a preferred funding partner.
A Few Last Words
Whether you’re looking to build a business from the ground up or you want to purchase an existing business or a franchise, achieving funding will be one of your most important and difficult challenges. Knowing your options and choosing the best strategies for your unique situation will go a long way in ensuring the realization of your dream. And seeking the help of a professional funding company like Benetrends will further ensure that your business gets the best start possible.
NOTE: Every entrepreneur and situation is unique. What works for one may not be acceptable for another with the exact same financial circumstances. To come up with a personalized strategy that works best for you, you may want to consider consulting with a trusted funding expert who can review your personal financial statement and take into account your goals and preferences.