If you dream of owning your own business, franchising can be a great place to start. It offers you the opportunity to run a business while benefiting from the support of an established company. When thinking about purchasing your own franchise business, one of the biggest questions people face is how to fund it without risking it all.
If you share these concerns, rest assured that you are not alone. And the good news is that there are plenty of options available to you that make owning a franchise business a really realistic opportunity. Here’s everything you need to know.
What is a Franchise?
You likely know if you’ve found yourself here but in case you don’t, a franchise is a business model that allows you to operate an already established brand in your own location. You will pay an upfront fee as well as royalties to the franchisor and in return, you will have the freedom to use their brand imaging and training and access their training and support.
If you are looking to start operating your own business, choosing to set up your own franchise is an ideal solution.
Benefits of Investing in an Existing Business
Investing in an existing business by setting up your own franchise brings an array of benefits.
- Brand Reputation: By buying into an already established brand, you hit the ground running. You will benefit from brand recognition and existing marketing strategies which saves you time, stress and money when you are first starting up.
- Training and Support: Instead of learning as you go along, you can learn from the experience of others. With a franchise, you gain access to a variety of training materials as well as ongoing support that better guarantees your success.
- Proven Success: When starting your own business, the risk can be high. But when becoming a franchisee, the risk is significantly lower. You can ride the success of the existing franchise and follow a proven business plan which will give you confidence when starting out.
- Funding Approval: If you are following a proven business model instead of starting from scratch, you are more likely to be approved by lenders for your financing. This helps you to get off the ground quickly.
How to Fund a New Franchise?
So how do people afford to open franchises? Whether you are just starting your entrepreneurial journey or have business experience but are looking to fund your first franchise, there are a variety of options available to you. Here are some options to explore.
Bootstrapping
One of the simplest ways to finance your franchise is through personal savings, the concept more commonly known as bootstrapping. You will incur no interest and won’t be subject to monthly repayments.
Although it does require some careful planning to ensure that you don’t overextend yourself, you are in control of how much you invest, giving you complete control over your business from the offset. If you are looking to progress quickly and have the savings available, funding from your own personal savings will be the best option.
SBA Loans
A Small Business Administration (SBA) loan is government-backed and aims to help entrepreneurs just like you to start a business. It gives a guarantee to the bank that they will back up your payments should you default. And as a result of this guarantee, the banks are more likely to lend you the money that you need to get your franchise up and running successfully.
There are two types of SBA loan to consider. The 7(a) loan which can be used for almost any business purpose, and the working capital loan which provides funding specifically to help you cover operational costs of the franchise. They both offer low interest rates and long repayment terms, but the latter does not require a down payment or collateral which means these usually close quicker.
ROBS
A lesser-known financing option is Rollovers as Business Start-ups (ROBS). This strategy allows you to use your retirement fund such as a 401(k) to fund your franchise business. You won’t be subject to early withdrawal penalties or taxes, and you won’t be borrowing money so there are no monthly repayments, interest or debts.
If you have over $50,000 in your retirement fund, ROBS is an ideal option, enabling you to invest in yourself to hopefully secure a greater pension later in life.
Home Equity Loans
If you own your own home, you may be able to tap into the equity you have built in order to finance your new franchise opportunity. A Home Equity Loan or Home Equity Line of Credit (HELOC) is a common way to secure the finance needed to open a franchise.
It must be noted that the risk of this type of loan is significantly higher but nevertheless it is an effective way of securing the loan that you need to get started. And for the most part, it is quick and easy to obtain.
Conventional Loans
A popular method of financing for many franchisees is a conventional bank loan. If your credit score is high and you come armed with a watertight business plan, you will likely enjoy competitive interest rates and extended repayment terms from your bank. These loans can then be used to secure your first franchise, supporting you as you start up.
It’s important to note that banks generally have stricter terms, requiring detailed information about your plans, the franchise model and could even request collateral or a personal guarantee in some cases. This puts the risk level higher than other financing options.
Asset Finance
If your franchise requires significant spending on equipment, you have the option of asset finance. For example, if your franchise business is within the gym and fitness industry, there will likely be weight machines that you’re looking to purchase. With asset finance, you will be financing – or leasing – that particular equipment.
As the loan is secured against the machinery itself, you will generally benefit from low interest rates and long repayment schedules that support you as you get your business started. And the security of the loan gives you a strong chance of being accepted.
If you are considering asset finance, it’s beneficial to speak with the franchisor as some will have an approved supplier or a finance partner for equipment that may provide you with discount opportunities.
Understanding Timelines, Complexity and Risk
Although there are plenty of funding options to choose from, it’s important to consider the timelines, complexity and risk of each. This will help you to make an informed decision on which option to pursue.
If you are looking for the quickest and least complex way to secure funding for your franchise, utilizing personal savings is a winner – providing you have enough available. If you are not looking to use your own finances, both SBA loans and asset financing can be a great solution.
The risk is generally low for both because the loans are secured and the approval process is often timely. Securing an SBA loan could be complex though as it usually requires a watertight credit score and business plan. You should determine the timeline, risk and level of complexity that you are looking for, and this can help to narrow down the best financing option for you.
Why a Strong Business Plan is Essential for Securing Funding
The process of securing financing is often where franchise dreams either come true or are shattered. Anything in your history that could pose a liability to a potential lender will be looked at and the risk assessed. Whichever route you take to finance your franchise business, if you are looking to secure funding, a well thought out, organized and complete business plan is essential.
This demonstrates to lenders that you are committed to your plans, understand any risks involved and have considered how to manage these crises. This plan could include a variety of information including:
- The cost involved and how expenses will be paid.
- Revenue and profitability forecasts.
- Details about you and your career history.
- A clear repayment strategy.
Remember, the more robust your business plan, the more likely you are to receive the funding that you have applied for.
What Franchise is Best for Beginners?
Often a decision that requires much thought and consideration is choosing which franchise model you would like to invest in. Not all franchise niches are beginner friendly. Typically, the best models for beginners are those that offer simple operations, have strong training and support and in some cases, require less investment.
As a first-time franchisee, you could look to open a business in one of the following industries:
Health and Fitness
The health and fitness industry is expanding with more people focused on well-being more than ever. And franchise opportunities in this industry thrive as most revenue is generated through memberships as well as one-off attendees. From gyms to recreational sports centers, there are plenty of options for you to choose from.
Retail and E-Commerce
Franchises that offer both in-store and online sales opportunities are a great choice for beginners. You’ll serve multiple platforms and build a loyal customer base for returning revenue. And with an array of retail and e-commerce opportunities to choose from, you have flexibility to choose the industry that interests you the most.
Real Estate Services
Offering low overhead and high returning potential, real estate services are high in demand. From property management to estate agencies, you can quickly and easily build a loyal customer base the generates steady revenue alongside one-off sales.
Travel and Hospitality
These industries are ever popular and showing no signs of slowing down anytime soon, making it a great choice for your first franchise. From travel agencies to rental property management and hospitality services, there is the potential for high profit margins and to create a loyal customer base.
Home Services
The home services industry will always be in demand which makes it relatively low risk when choosing your franchise business. Covering a range of services from cleaning to landscaping, you can meet a diverse range of customer needs. And in most cases, you won’t need to operate out of a store, reducing costs and making your start up more efficient.
Running a Successful Franchise Business
When it comes to running a successful franchise business, you should follow the below tips.
Assess Your Funding Options
Carefully consider the funding that you will need to open and run your franchise. Aside from the franchise fee, there will be additional costs to factor in such as real estate costs, equipment, inventory and operational expenses. Your business plan should cover all of these elements.
Choose an Industry you Enjoy
Think about the type of business you would like to run. It should align with your hobbies and interests as well as your style of management. Are you hands on or would you prefer something a little more passive? Once you have defined your lifestyle goals and interests, you can easily choose the best industry for you.
Take Advantage of Support and Training
One of the main advantages of choosing a franchise over a new business is the access you get to training and support. You should use these as best you can in order to get your franchise off to the best start possible.
Invest in Yourself
With other options available to better yourself as a franchisee, you should look into ways that you can invest in yourself. As a first-time franchisee, consider a franchise coaching course that will teach you the essentials that you need to know to ensure that your business is a success.
Speak to the Experts at Guerrilla Franchising
Want more information on how to fund a new franchise? Get in touch with the experts at Guerrilla Franchising. With dedicated training and coaching, you will learn everything that you need to know to get your franchise up and running successfully without risking it all. Get started today by booking your free 15-minute strategy session with our experts. We look forward to welcoming you onboard soon.