How to Go About Funding

In the vast majority of new franchises, some form of outside funding is sought. Usually what this means is asking the bank for a business loan. There are also alternative sources of outside funding, such as getting a loan from someone you know or in some rare cases, seeking some kind of venture capital. All in all, about ninety percent of start-up businesses require some kind of additional funding. The purpose of this outside funding is to make sure that the business has everything it needs from the moment that the business begins, to the point where it reaches profit making status.

Determining funding for a franchise business requires taking a realistic look at your finances. Banks that provide business loans typically expect a franchise starter to have around thirty percent of the money which is needed to get started available in cash. This money should also represent no more than around seventy five percent, at the most, of your personal finances. In the event that the business struggles or is unsuccessful, the bank does not want you to have to risk the entirety of your personal finances or endanger your financial well-being. If you are interested in starting a franchise, but do not yet have enough money to qualify for a business loan, the smartest thing to do is to be patient. Continue saving until you have enough money to make a strong shot at having a successful business without putting any undue strain on yourself.

In order to get the most accurate numbers on how much money you will need to start a franchise, ask the specific franchisor that you are interested in working with. Not only will the franchisor be able to tell you what degree of resources are required to get started, they can also help you by giving you details on the loan options most often available from local banks. They can also help you put together your business plan and loan application thereby improving negotiations with your local bank. Franchisors also sometimes have special arrangements available in which they take some of the financial burden of starting the new business. This is sometimes called “debt financing”. Another possibility (and one of the many advantages of working with a franchisor to start a business rather than starting one from scratch) is that the franchisor will be able to help you make special arrangements with local contractors and suppliers of the equipment and materials you will need to start the business. Whenever you are in doubt, just describe your situation to the franchisor and see what kind of advice they can offer. They are often very experienced in helping new business owners handle the expenses of running their specific franchise, and may be able to provide assistance and advice that you wouldn’t necessarily think of on your own.

While a money lending arrangement with the franchisor is the most likely to provide all the support that you need, it may also come at the cost of relatively high interest rates and repayment terms that are less than perfect. While the franchisor is still the best source for information – knowing exactly how much you can expect to need and what kind of expenses it will be used for – there are a wide range of sources from which you can get the same money. Often it is possible to get the best lending rates from one’s own friends and family. If you can make up even a small part of the cost of starting your business this way, it is to your advantage as your friends and family will not charge you high interest rates and will generally not require collateral. However, be sure that you do not try to borrow more than your relations can afford and be honourable in your dealings with them to keep your relationships on a sure footing. Another common source of funding is a home mortgage loan / home equity loan, a bank loan or an SBA loan (Small Business Administration loan). While a home mortgage loan is likely to give you better repayment terms and a lower interest rate than a business loan of the same size, it requires that you put up your house as collateral. This means that the success of your business, and your ability to repay the loan, will determine whether you are able to keep your home. You should only risk what you are willing to lose, and so you should be careful when signing loans that use things important to you as collateral. Make sure that you look at all of the other possibilities first – such as stocks, IRAs, bonds and insurance policies. Anything you have which has value can be used to help you acquire a loan. Also, make sure that in the event your business fails, you have some way of taking care of the most important loans so that they do not have too large an effect on your quality of life.

If you live in the United States, SBA loans are one of the best options because an SBA loan is usually backed by the Small Business Association up to ninety percent and does not require your home as collateral. The Small Business Association provides a wide variety of loan types and micro loans that you can use for all sorts of business endeavours. For some specialized industries or areas of the country the Small Business Administration may offer even better loan conditions as a way to encourage specific businesses, and some groups such as veterans or people with low income levels or disabilities may also be able to receive special funding alternatives. The Small Business Administration has a strong presence online with lots of information about the programs which they offer and you can easily ask for specific details on the kind of assistance available to you. No matter who is providing the loan for you to start your business, it is important for you to think in advance about everything you may need for the business. You must be able to provide a strong business plan which demonstrates that you understand the local market and have researched the costs and benefits of doing business there. You must have a strong sense of what you intend to accomplish as well as checkpoints to determine how your business is progressing. When you present your case for a business loan to potential lenders you must give them the best possible impression of yourself; not only must you show them that you understand what you are getting into and know how to deal with any potential challenges, but can also demonstrate a positive attitude with good people and communication skills. You must also demonstrate that you are able to function well in a business environment working with employees and delegating responsibility, and that you have the ability to learn and be flexible and resourceful enough to deal with any circumstances which may occur. Once you have made all the preparations that you need in order to run a successful business, be effective at communicating that same preparedness to your potential lenders.

In review, the most important things to remember when you are looking for funding for your franchise are first to make sure that you understand all of the potential costs and hazards, as well as the potential benefits, of running your business (and that you have all the pertinent information at your disposal – which is generally made much easier through the cooperation of a franchisor), and second to communicate your vision and goals, as well as your personal characteristics which make it more likely that your business is going to succeed, to those lenders which are able to provide you with the best lending rates and the best repayment terms. Be patient when you are putting together your business plan and collecting the funds for it, and if you do not yet have enough resources to start a business comfortably, wait until you do. It isn’t worth putting your home in jeopardy over a home equity loan if you have nowhere else to go, and it isn’t worth putting your life under great financial stress during the opening months of a new franchise business. Wait until you are ready, and you will be able to focus your attention on your business without having to worry about your personal finances. Apply the same kind of care to the earliest preparatory and research stages of starting a new franchise business as to the day to day management and profit making side of the business, and you will increase the odds of being one of those successful franchise owners who make it all work.