You've already selected the particular franchise you want to buy. Do you know how you're going to pay for it? If you think it's just a matter of going to your local bank and getting a loan, think again. In addition to other criteria, unless a bank loan is backed by collateral -- property acceptable as security (like your home) -- you will have a hard time securing one. You've already selected the particular franchise you want to buy. Do you know how you're going to pay for it? If you think it's just a matter of going to your local bank and getting a loan, think again. In addition to other criteria, unless a bank loan is backed by collateral -- property acceptable as security (like your home) -- you will have a hard time securing one. Be aware that most lending institutions expect to see a solid business plan, and at least 25 to 30 percent of the capital needed coming from you. This is a good faith assurance that you have a vested interest in your new business. The more money owners have invested in their business, the easier it is to attract financing. Another key factor that banks evaluate is whether or not the individual applying for the loan has a strong personal and business credit history The good news for franchisees is that they generally have an easier time securing loans than their independent-owner counterparts. This is due to established franchises that have a history of selecting successful franchisees and a history of franchise success. Financing options The Franchisor The very first thing you should do is seek information about financing from your future franchisor. A successful and established franchisor will most likely be able to assist you with your financing; whether it's with writing a business plan, securing a loan, or even providing their own financing programs for new franchisees. Also ask some of their existing franchisees where they obtained financing. The Franchisee In addition to the use of savings, stocks, bonds, or property liquidation, franchisees may be eligible for the following financing options: Home Equity Loan: Many new franchisees raise capital by taking out a home-equity loan. If you can cover some or all of your costs and expenses with this method, fine. But leave about 30 percent of your home's value intact as an "insurance policy" in the event you need to borrow more money later on. Severance Package or Retirement Account: Quite a few downsized or retired professionals have purchased franchises to fulfill their dream of owning their own business. Severance pay or retirement accounts -- such as 401Ks -- can be used without penalty to fund a portion or all of franchise start-up costs. If you do plan to tap into your retirement account, check first and seek assistance from an accountant familiar with IRS rules governing their use. Lending Institutions: Banks, Savings and Loans, Commercial Finance Companies Historically, banks have been a major source of small business funding. Their principal role has been as short-term lender; banks generally have been reluctant to offer long-term loans to small firms. One easy way to borrow money from a bank is to set up a line of credit. In order to do so though, you must have sufficient personal collateral. Typically, this collateral is in the form of home equity. If you default on the loan, banks need a way to recoup their losses. They also know that, with something like your home on the line, there is significant assurance that you'll do your utmost to succeed. If banks won't give you what you need, consider a commercial finance company. Finance companies typically advance funds based on a percentage of a firm's assets, and cash is turned over to the lender to pay down the loan when that business's receivables are paid. Along with higher fees, finance companies usually require rigorous reporting of key aspects of business operation. If banks won't give you what you need, consider a commercial finance company. Finance companies typically advance funds based on a percentage of a firm's assets, and cash is turned over to the lender to pay down the loan when that business's receivables are paid. Along with higher fees, finance companies usually require rigorous reporting of key aspects of business operation. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA itself does not make the loans but guarantees up to 85% of a start-up franchise loan. Rates are usually competitive and terms are generally longer than other sources. It would serve you well to familiarize yourself with all the SBA has to offer. Go to their website, www.sba.gov., and click on Financing Your Business. There you can learn about estimating financing costs, SBA loan programs, preparing financial statements, financial management for a growing business, and much, much more. SBA's new Franchise Registry lists names of franchise companies whose franchisees enjoy the benefits of a streamlined review process for SBA loan applications. Participation in the registry is voluntary, and a franchise system's presence or absence on the registry should not be construed as either an endorsement or disapproval on the part of the SBA. Friends and Family This option is fraught with more than a few pitfalls. Mixing friends or family with money is seldom a good idea. Whether you agree to return their money with interest, or offer a percentage of profits as a return for their investment, be sure to have an attorney draw up a formal contract. And never take money from a friend or relative who cannot afford to lose the entire sum. Business Partner(s) Consider partnering with one of more individuals so you can each share in the financing of your new franchise. Find out if business partnership would be a viable option by reading businessknowhow.com's article, Is a Business Partnership the Right Choice for You? Remember, take your time to identify and evaluate all financing options available to you. Don't be satisfied with just finding a loan, any loan. That first bank that approves your loan application, the one charging absurd rates, is probably not your optimum choice.
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