So, you’re ready to start your franchise
After the long road of researching your business ownership options, you’ve selected the franchise that you’re most excited about—Congratulations!
The next question that inevitably comes up (though, hopefully, you’ve thought about this along the way) is: how are you going to pay for it?
Like starting any business, investing in a franchise requires some costs that you will incur before you start selling and bringing in revenue. This is a common concern for any new business owner. Luckily, as a prospective new franchisee, you have all the same options as any new business owner, plus one. Let’s take a look at how you can start planning for your initial franchise investment.
Common Franchise Costs
Like starting any business, investing a franchise requires startup capital. Some of these costs are fixed and predictable, while others are variable. Common franchise startup costs include:
- Franchise Fee
- Legal and Accounting Fees
- Working Capital
- Build-out Costs
- Training Expenses
- Marketing and Advertising Costs
The total costs for these expenses vary widely depending on the type of franchise you’re investing in. There are great franchises that can be started for under $100,000, while others will require a much higher investment.
Additionally, choosing a home-based, professional services franchise will save you a significant amount in build-out and inventory costs.
1. Personal Financial Assets
Of course, if you have personal financial assets to pull from, this is your first stop. Many business owners use their personal savings and the sale of stocks, bonds, etc. to pump the initial infusion of cash into their business. Just make sure that you have enough savings to sustain you until you have revenue coming into the business and are beginning to turn a profit.
2. Franchisor Financing
Many franchisors offer financing either directly or through lender partnerships. Franchisor financing is one of the most common ways to finance a franchise investment and offer the benefit of convenience. Financing your investment through a franchisor often means that you don’t have to look elsewhere for additional financing and all of your leveraged debt is housed in one place. Some franchisors offer deferred payment and/or sliding scale repayment options. Just make sure you review the terms of the financing agreement with your own lawyer and accountant before signing on the dotted line!
3. Commercial Bank, VA, and SBA Loans
Financing your franchise investment through a more traditional bank loan is another common and popular option. Great repayment and interest options are available to those who can qualify for a VA or SBA loan—so this is where you will want to start before going for the commercial bank loan. In any case, the banker will want to review your credit history and business plan to determine if you are eligible.
4. Home Equity Loan or Second Mortgage
Some prospective franchisees opt to take out a loan such as a Home Equity Line of Credit (HELOC) or second mortgage to finance their franchise investment. The benefits to this is you get a large, lump sum of cash at a relatively low-interest rate with a longer repayment period (thus, lower monthly payments). The main drawback is you risk losing your home, and the equity you’ve built up with it if you are unable to repay the loan.
5. Retirement Rollover for Business Startups (ROBS)
ROBS provides a debt-free way to finance your franchise investment. It allows you to pull cash from your retirement account without paying taxes or early withdrawal penalties to start up a business. You must have at least $50,000 in your account, and Roth accounts are not eligible. Keep in mind that your account provider will charge their own administration fees for ROBS transactions.
Financing your new franchise is a huge decision that cannot be taken lightly. You are strongly encouraged to seek out your own legal and accounting advice before deciding on any financing options.
But, as many franchisees over decades have found, the investment is well worth it in the long-run.
Are you ready to take your next step? Click here to learn more about being a Crestcom franchisee.