How To Finance A Home Based Business Franchise
As every experienced businessperson knows, great business opportunities don’t come around every day, so when one does come along, the last thing anyone wants is to let it slip away for lack of funding. Because few of us have the cash-in-hand to up and purchase a good franchise when it comes along, however, the average entrepreneur has to resort to finding financial resources elsewhere. Here are some of the more common means of paying for that perfect franchise opportunity.
Commercial Banks
This is the most commonly used avenue for obtaining financing for a new franchise business, particularly for a home based business, and it’s a fine way to go. Generally, a person can get a loan from a bank for up to $100,000 on nothing more than personal credit, which is perfect, because home based businesses typically don’t reach prices in the $100,000+ range.
If, however, an entrepreneur were looking at starting a franchise that was over that pricing threshold, a commercial bank would still be more likely to finance him than they would his non-franchised small business counterpart. The simple fact is that far more franchise businesses see a successful 10-year lifespan than do independent business ventures, and banks know this. In fact, the difference in 10-year success rates is 92% to 20% in favor of franchises, making any bank’s choice of whom to finance a much easier decision.
Knowing that the franchisor has a successful track record and a solid business plan absolutely counts in the eyes of the bank. They take that business connection so seriously, in fact, that it’s often possible for the franchisee to use it to either whittle down the interest rate a little or obtain a larger total loan than he would have gotten without the franchise connection.
Private Investors
Whether they’re family and friends or only business partners, private investors can either be a great business advantage or a terrible trial in your career.
Just the same as any lending agency, a private investor contributes to the initial purchase and startup for your work at home franchise, helping it get off the ground. Then, as the business begins to see money come in, the investor gets a predetermined, and generally rather large, cut of the gross income each month until his initial investment is paid back. Then, depending on the contract terms, he still receives a certain cut of the income for the remaining life of the business.
This can be a great plan for all parties involved, but it can also be a headache if the investor is not as interested in the success of the business as he is in filling his wallet. Sometimes an investor will take such a large chunk of the growing business’ monthly gross income that there doesn’t even remain enough to adequately maintain operation.
It’s important to lay out a very clear contract at the beginning of the relationship with any investors, so that the person who got your business off the ground doesn’t also become the one who shoots it out of the sky.
The Franchisor
Knowing how hard it can be to amass the capital to start a franchise business, even for capable businessmen who would bring as much to the company as they would receive from it, many franchisors have begun lending franchise fees and startup capital to franchisees. This is becoming an increasingly popular means of obtaining financing for a franchise opportunity, in part because it’s so much easier for the franchisee than going to a third-party lender. However, there’s always a price for convenience, and in this case, it’s generally a higher interest rate.
Home Equity
For some people, this is the way to go. Home equity loans offer some of the best interest rates available, so for those who have a sure-fire work from home business plan and perhaps a home all to themselves, it could be a good option for getting business under way. However, the franchisee with a wife and kids has to stop and ask himself if risking the home equity is the wise move for the family as a whole.
Small Business Administration
As surprising as it may sound, the government is a great place to find the financing necessary for a franchise business, because they are genuinely interested in getting more small businesses up and running around the country. That is actually the sole reason for the existence of the US Small Business Administration.
Though they themselves don’t actually provide the capital to start and maintain businesses, the SBA does provide a 75% guarantee (up to $750,000) to private lenders on behalf of businesses that they feel have what it takes to succeed. Needless to say, this kind of support prompts most lending agencies to provide the loan.
The SBA does require some information though. What they most want, and reasonably so, is proof that the business is worth their backing. Potential business owners must provide a complete picture of the business, its plan and goals, a cost outlook, and a history of their own experience in similar business. In many cases, this process is accelerated for people buying franchises, because all that information has already been provided by the franchisor and recorded in the SBA’s franchise registry, which officially makes it a trusted and acceptable business for the SBA guarantee.
Weigh the Differences
The biggest difficulty in finding a financing source for your business is determining which is right for you and your situation. As you continue to learn more about the different ways that you can get the financing you need for your specific business endeavors, keep in mind that your situation is going to be different than everyone else’s, and therefore, so will your perfect lender.
