 During the lending heyday which peaked during 2006 and 2007, it wasn’t difficult to secure a small business loan. As long as you had decent credit and a viable business plan, the money was virtually in your pocket before you even contacted a lending institution. After the bubble burst in 2008, however, things became a little more complicated. Banks weren’t handing out loans to any old Joe anymore, and regulations were tighter than ever. Luckily, the world of small business loans has revived a bit—though it’s still nowhere near the boom it experienced several years ago—and the chances of getting a loan are now fairly good. Here are some things to consider when preparing for and initiating a loan to finance your small business franchise.
- You can go the traditional route. That is, you can get a small business loan from your bank, but it is much harder given the current economy. If you have impeccable credit, a longstanding reputation with your local bank, and a solid business plan, then you might have a decent chance. If the traditional route leads you to a dead end, however, don’t give up. There are alternatives to consider.
- You can take out a home equity loan.
Recently, with the rejection rates from banks soaring, home equity loans have become a feasible and attractive alternative to funding a small business franchise. The rates are often much lower, and the loans are easier to get, but there is one very serious downside to consider—you are putting your home on the line. If you lose your business, there’s a good chance you’ll lose your home as well, so ponder this sobering fact very carefully before pursuing this financing option.
- You can use your retirement funds. Most prospective entrepreneurs never even think of this option—but it’s true, you can use your 401K or other retirement plan to fund your business. Of course, you will want to carefully consider your other options first as well as any potential pitfalls to this funding strategy before tapping your retirement account. It is a little like putting all of your financial eggs into one basket, so be sure that your franchise is not a risky one if you’ve decided to go this route. There are two ways you can use your current retirement accounts to fund your future business. You can either borrow from it, or initiate what’s called a Rollovers as Business Startups, or ROBS, plan. There are pros and cons to both options. For one, the first option is much simpler, and you can do it on your own simply by making a call to the administrator of your retirement account. However, you can only borrow half of what’s in your account up to a maximum amount of $50,000. You will also have to make regular payments on this loan and pay interest fees, even though you’re essentially borrowing money from yourself. The second choice—the ROBS—plan offers you a little more freedom, but it’s a much more complicated process, so you’ll need a financial advisor to walk you through it. With this plan, you’re basically wiping out your retirement fund and putting it in bed with your business. After the rollover is complete, you’re pretty much free to do whatever you want with the funds and expand your investment opportunities as well.
- You can borrow money directly from the franchisor.
Sometimes, that is. Secure franchisors who wish to grow their corporation despite the current lack of lenders have come up with their own solution by providing direct financing to qualified franchisees. These loans can help you pay the initial startup costs of opening your business including any royalty fees. This is a relatively new trend, however, and not all franchises offer this option. Talk to your particular franchisor for more information.
ConclusionThere are a lot of weighty issues to consider when opening a small business franchise, not the least of which is how to finance it. Although it can be a stressful decision to make, and you may face some obstacles along the way to funding your dreams, don’t let this stop you. If you’re serious about becoming a franchisee, there are many financing options available, and there’s sure to be one that’s right for you.
References5 Unconventional Ways to Fund your Franchise. Entrepreneur. Retrieved from http://www.entrepreneur.com/franchises/buyingafranchisecoachjeffelgin/article200676.html#. 10 Good Reasons Franchise Buyers Need a Lawyer. Entrepreneur. Retrieved from
http://www.entrepreneur.com/article/217356#. A Crash Course in Financing a Franchise Business. Franchise Prospector. Retrieved from http://www.franchiseprospector.com/money-financing/finance-4.php. Finance Your Franchise with Retirement Funds. Entrepreneur. Retrieved from http://www.entrepreneur.com/franchises/buyingafranchisecoachjeffelgin/article206310.html#. |
