The primary reason businesses fail in the US is not because the idea is bad or for lack of being mentally prepared, or even lack of experience. It is for lack of full and proper franchise funding.
If you buy the most expensive car you can afford and then don’t have enough money to put gas in it, it probably wasn’t the right car for you. The same is true for getting into business. You’re going to need fuel for the vehicle.
All franchisors have financial requirements that all new franchisees must meet or exceed. These requirements for liquidity and net worth are established to make sure the new franchisees have enough money to fully fund the startup of the business. They must also have access to appropriate operating capital to fund the franchise business as it ramps up to profitability.
That does not mean that you have to empty out your hard earned savings or cash in your retirement accounts. If you don’t have enough money to fully fund your new venture, or simply want to keep a rainy day fund, you’re going to need funding. Where will you get it?
Never fear. If you have guarded your credit score and have set aside enough money to pay the franchise fee in cash, the funding is available. Funding institutions will look for credit scores of 700 or better and $50,000 in liquidity as minimum requirements. If you’re there, congratulations: Your opportunities are limitless.
Here are 3 common ways to fund your new franchise venture:
Qualified retirement account funding: This is a program that has been approved by the IRS and the US Dept. of Labor for many years and is the fastest, most preferred franchise funding vehicle other than straight cash.
Very simplistically it works like this; after you are no longer employed by the company who offered your 401k or qualified retirement plan and while you are researching your new business, you will be thinking about which type of corporate model to establish to protect your new business.
You will need to set up a C-Corp because the IRS tax structure is different for C-Corps than other corporate classifications. Then you will need to transfer your old qualified retirement account over to your newly formed corporation.
Don’t worry. You don’t need to change brokerage houses; just administrators and ownership. If your retirement account was managed by Fidelity, for example, it can stay at Fidelity. There is a small cost for setting up the new administration, but there is no penalty. The advantages are many.
Retirement plans regularly invest in businesses. Now it can invest in yours! You can pay it back at your own schedule, at your own interest rate, and you can even fund your new salary and operating capital until your business has ramped up to the point where it can support you. A high credit score is not required for this type of funding…it’s your money!
SBA (Small Business Administration) Guaranteed Loans: Many lending institutions offer SBA loans. Again very simplistically, these are government guaranteed loans. The specific terms of SBA loans are negotiated between a borrower and an SBA-approved lender. In general, the following provisions apply to all SBA 7(a) loans.
- SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. SBA’s maximum exposure amount is $3,750,000. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3,750,000 or 75%.
- There will be varying fees depending on the size and guarantee on the loans, and interest rates will be competitive.
Unsecured Business Lines of Credit: UBLOCs are a great way to create credit lines to use for startup costs, operating capital or unexpected business expenses. These are credit lines set up based on credit score and history anywhere from $50,000 to $150,000.
The advantages are that you only pay back the amount you use, and the interest rates are very competitive (many times 0% for the first year.) The set up costs will vary depending on the amount of credit needed and the program used.
If you have questions about franchise funding sources, or any other question about franchising, call or email Sid Lee at:
phone: 703-392-9085 email: email@example.com