Business

Establishing a Franchise? 3 Frequent Financial Concerns and How to Confront Them

In many instances, a tried-and-true business strategy with built-in brand awareness might facilitate your franchise’s financing application. Especially if you have been in business for several years or already own several franchises.
This uncommon business strategy can be challenging to finance, especially when starting a franchise business. Here are three frequent franchise financing concerns and the solutions to them.

Establishing a Franchise

Fear #1: You will not qualify for sufficient startup finance.

Depending on your degree of experience, the costs associated with launching a franchise can range from less than $10,000 to more than $300,000. If this is your first time to become a franchise owner, costs will likely be on the higher end, and you may have a more difficult time qualifying for funding.

Solution 1: Inquire about internal finance.

It is not common for franchises to offer financial packages to new business owners. If this is the case, you already have a source of money for your new firm.
However, even if your franchise offers funding, you may want to examine alternative choices, which may have more attractive terms or interest rates.

Solution 2: Consider franchise and startup lender options

Consult with lenders specializing in franchise financing; they often provide funds to get your new unit operational. Even if you haven’t yet opened your doors, lenders who assist with startups may be able to help you obtain some or all of the necessary cash.
Due to the fact that your business model is already proven, you may have an easier time negotiating a competitive rate and term than non-franchise businesses. However, these lenders rely significantly on your personal credit and company expertise, so if you’re new to the game, this may not be your best option.

Solution 3: Obtain a personal loan

Have decent credit and require less than $50,000? Comparing the best accessible personal loans could help you locate an even more competitive interest rate. Personal loans typically offer lower interest rates than commercial loans.
To qualify, you must have a stable source of income, and if you’re self-employed, you may have difficulty getting accepted.

Solution 4: Roll over your retirement fund

You can utilize more than $50,000 from a 401(k) or IRA to start a new business. This is known as a Rollover for Startup Businesses (ROBS).
Due to the complexity of the procedure, many business owners prefer to employ a company to help them establish and manage their new retirement account. It can cost approximately $4,000 up front, but may eventually be less expensive than a loan.

Fear #2: You will not receive funding for a second unit

You wish to start a second franchise; this may be a contractual requirement or a desire to expand. Financing your second unit can be the most challenging, as lenders now have a firm under the same management and business plan to evaluate.

Solution 1: Wait until you are prepared to apply for a bank loan before doing so.

The wisest course of action is to wait. Even if your franchise unit’s first six months are prosperous, banks will often offer more favorable rates and terms to businesses that have been in operation for at least three years. In fact, some may not work with you at all until then.
If you have the time, wait until you are completely at ease with the management of your first franchise unit before expanding. When you’re prepared, you’ll have a greater chance of qualifying for cheaper rates and more favorable terms, and you’ll be more equipped to ensure the success of your second site.

Solution 2: Save any personal funds towards the second unit’s opening.

Sometimes waiting is not an option, especially if your franchise agreement stipulates that you must create a second site within the first few years. Therefore, you should borrow money to open your first site and save your personal funds for opening your second location.
This will not only help you finance your new unit, but it may also make it easier for you to obtain financing in the future. Lenders want to collaborate with business owners who have skin in the game.

Fear #3:  You won’t be able to acquire emergency funds quickly enough.

As a franchise owner, obtaining a bank or Small Business Administration (SBA) loan is typically easier than for other small firms. However, bank loans might take up to two weeks to fund, and SBA loans can take even longer. That will not suffice in the event of an emergency expense, such as a broken piece of equipment or a particularly slow season.

Solution 1: Obtain a term loan online

Online business loans may be your best option if you require financing quickly. Some can provide funds as quickly as the following working day.
However, conduct research to guarantee you are receiving a good offer. Online lenders often charge higher interest rates than banks, which can range from 30 to 80 percent APR.

Solution 2: Use a merchant cash advance.

If your company does not qualify for a term loan, a merchant cash advance (MCA) may be your best alternative. MCA firms provide advances on your company’s future sales, which are repaid with a percentage of your daily earnings plus a fixed fee. And funding is frequently available the following business day.

This sort of financing does not require a high credit score or a lengthy business history. However, it comes at a heavy cost. Frequently, costs result in APRs above 100 percent, and sometimes even 300 percent. Reserving it for a true emergency and carefully weighing the negatives before to signing up for the programme.

Bottom Line

When it comes to funding, franchises have numerous advantages over other business models. Utilize low-interest bank and SBA loans whenever possible. However, if you’re just starting off, want to create a second location, or have an unexpected need, you may need to consider online business loans.

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