The best way to Finance a Franchise
Whether you write a personal check, utilize the equity in your home, use your 401K money or get a business loan, one way or the other, you’re financing your operation. Financing it the right way is important to your long-term success. It could not be as critical as finding the right locations, but it is close.
Generally speaking, in reducing the stress of your franchise business, you will have three basic options:
The selection I: Finance it out of one’s pocket, either by producing a check from savings, cashing out retirement assets, or something other means,
Option II: Take out a loan secured of your assets, such as the equity loan or the SBA loan, or
Selection III: Take out a commercial business cash advance for franchise financing.
Each option has its pluses and minuses. The best option for you will be based on several factors, including your target for your new business. One option might be best if you want to open a single location, and one more if your goal is to open several within a given time frame. What follows is actually a discussion of the various options, and one might or is probably not the best one for you. It truly is our goal to help you face the best decision possible, according to your current situation and goals. Options for Franchise Financing Alternative I: Finance it out of your pocket.
If your objective is always to open only one location in addition to the liquid cash to spread it and make it profitable, this is not a bad selection. You will lose the interest attained on your money but prevent the interest cost of borrowing. Again, this may not be a terrible choice if you intend to open more than one location and possess the resources to get them all to help profitability.
However, if you have the information to open the first location and plan to rely on using financial from the first one to open another, third, etc., be careful. Take into account that if you have cash in the bank and equity in your materials, you can always use that to get working capital or expansions in the future. If you plan to rely on professional financing at any time, financing the former is what gives you the greatest mobility.
That’s the downside of this option. Getting personal money tied up in a very business limits your mobility in the future. You may or may not be able to take full advantage of a future opportunity when it comes down. Many books discuss the value of using OPM (Other People’s Money) in opening and growing a prosperous business.
Option II: Sign up for a loan secured by your private assets. This Option provides better flexibility than Option I. Your liquid assets remain water, allowing you to respond to changing business needs. The net, the big after-tax difference between interest earned and interest paid, can be reduced, making this a viable alternative to Alternative I.
The downside of this Alternative comes in two forms: (1) tying up the personal property you pledge as safety, and (2) the true, all-in cost of the financing.
Binding up your assets restricts your choice and flexibility in the future. For example, we recently funded a second location for a certain franchisee. He had taken out a SMALL BUSINESS ADMINISTRATION loan for his initial location using his household security. He learned the lender also had a medical history and a lien against his / her first location, but not a soul thought this would be a problem because we planned to protect our loan solely with his new location.
You discovered during the title seek that when the original loan company filed their lien up against the franchisee’s business, they detailed the location they were financing and included the phrase “all future locations” in the attached filing. Those three tiny words meant that every location this franchisee would open at any time in the future would be considered security in opposition to his original loan! I was eventually able to resolve this specific but needed to negotiate any subordination agreement with the authentic lender.
The lesson is to be very careful about what the financial institution uses as security and safety on the loan because it could limit your options in the future.
The true, all-in cost of financing can often be complex. Unfortunately, some lenders are the same that way. They will quote a coffee interest rate but not the things and loan fees required. They won’t take the time to educate a new borrower on the differences between variable rate financing and glued rate financing. They won’t thoroughly disclose all the charges that happen to be incurred during the life of the loan.
The lesson is to get everything in writing and review it with a trustworthy advisor. Most reputable loan providers will issue an offer or term sheet with detailed information about payments, costs, terms, security, etc.
Alternative III: Take out a commercial business cash advance for franchise financing. This choice tends to offer the greatest overall flexibility to most franchisees. Franchise loan products are typically secured only with all franchise assets, departing all personal assets unencumbered. Pay close attention to what franchise property is being used as security (See the story under option II).
In terms of the true all-in associated with this type of financing, as described under Option II, this is often a complex subject. All of the products mentioned in connection with Option 2 apply here with choice III. Get proposals on paper, review those proposals having a trusted advisor, and make a completely informed decision.
About InSource Capital Services, Inc. All of us specialize in franchise financing. Because proud members of our nearby Better Business Bureau and the NAELB, we all promote and subscribe to a company Code of Ethics. We have been committed to “raising the bar” regarding fair and truthful business dealings with all the companies and business partners.
Top features of our Franchise Financing courses include:
Fixed-rate funding to 84 months
Zero outside collateral, other than typically the assets of the franchise plus your good credit
Pre-Funding, you can pay your Vendors instantly.
Credit approvals in as little as five working days.
Our commitments to all or any members of the franchise group include:
Fast Turnaround Instances
Clear Answers to your Inquiries
Honesty as well as Integrity
Finding a Way to finish the same job!
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