As with the use of home equity funds, use caution as you look at utilizing retirement dollars. Know the risks of putting this money earmarked for long-term security on the line for a business venture.
Franchises, as with all investments, have risks and can fail. Gifts, loans, and investments from family members can be a great source of capital for your business.
Some candidates will approach their close family members in hopes that everyone will reap the benefits of a successful franchise location. If you do accept funds from people you have personal relationships with, make sure you have an agreement in writing.
Include the terms and conditions of the gift, investment, or loan clearly outlined— including investment terms, payback terms, interest, and what happens if you default.
Having the details hammered out in an agreement may prevent a misunderstanding down the line. Franchisor financing is sometimes offered directly from a franchisor and sometimes provided through a third party prearranged by the franchisor. Programs vary widely, but some of these arrangements have notable benefits. For example, some may not require collateral; others might offer equipment leasing; some offer deferred payments.
Many have low-interest rates, but others may not even be competitive with traditional loans. Check with your franchisor to see what programs it may offer, then be sure to compare all the choices available to you. Some companies specialize in financing franchise businesses and can offer assistance with figuring out how to capitalize yours.
These companies understand the franchise business model and have relationships with financial institutions that fund franchise loans. Small Business Administration loans. In many cases, these companies have pre-approved dollars set aside to help people invest in franchised businesses. This can streamline the process of getting your investment dollars. Another alternative is to leverage conventional business loans or commercial loans. There are many types of commercial lending, including secured and unsecured loans, short- and long-term loans, equipment loans, and business lines of credit.
Be aware that many traditional lenders may not understand the franchise business model, unlike lenders who specialize in this area. The SBA offers loans through participating banks and lenders. SBA financing is not a government loan, but rather a private loan backed by government funds. There are multiple types of SBA loans you can investigate. Make sure you carefully evaluate the pros and cons associated with taking out an SBA versus a traditional loan.
This can include loan establishment cost, the length of the loan, and the interest rates of the loan. Note that if your franchise company is listed on the SBA registry, it may help expedite the process for a new franchisee to get an SBA loan. Also worth noting is the fact that individuals with high net worth may not qualify for this type of loan. This is a personal decision that every franchisee should make for themselves.
We have seen some great partnerships. We have also seen some terrible ones. A partner may provide an influx of capital, but you should consider that person owns a portion of the business. You will need to work together every day for success. Also be prepared for grand opening and initial advertising and promotional expenses. After you open, there ongoing expenses such as interest if you have a loan , supplies, salaries, professional fees, rent, utilities, maintenance, uniforms, and more.
Then, of course, there is the franchise fee -- the one-time entry price to use the franchisor's brand, operating system, and to receive ongoing support in management, training, marketing, and more. Once open, there are ongoing royalties to pay, which typically range from 4 percent to 8 percent of gross revenues and include an ongoing assessment for a joint marketing and advertising fund about 2 to 4 percent.
Franchisors usually have minimum financial requirements before seriously considering a candidate:. Entry costs vary based on the brand, size population of the territory awarded, real estate, and the level of services and support. Some brands offer incentives and operating models for new franchisees to get them started and through their start-up years. Examples include reduced royalties for the first year or two; deferred franchise fees; or smaller-scale versions of their brick-and-mortar concepts.
Many franchisors offer discounts to veterans, minorities, and women. Franchisors usually promote these incentives on their website. The International Franchise Association's VetFran program is a good place to learn more about these discounts and programs. Franchisors also offer limited-time deals on franchise fees and royalties, deferred payments, money-back guarantees, and other promotional incentives. These can be limited to specific geographical areas or markets where the brand is seeking to break in or expand its penetration.
Although the entry costs and ongoing expenses of getting into franchising may seem steep, it also costs money to start your own business. As part of your own due diligence, order a copy of your credit report and look for any inconsistencies or concerns. Want to learn more? E-mail me at PGilfillan FranChoice.
It is clear Pete Gilfillan is on a mission to help people take control of their destiny through franchise business ownership. Pete provides real stories that you can relate to of others that have followed a similar path with practical resources to guide you through the entire process. A must read for anyone considering franchise ownership!
Pete Gilfillan provides a unique perspective about the business model that seems perfectly poised to expand in nearly every industry. It offers solid, real world advice on making the very best choice for your goals and lifestyle. Pete Gilfillan takes you on an exciting journey to not only learn if franchise ownership is right for you but how best to finance and structure your venture for long-term success. Pete Gilfillan makes a compelling case for taking one giant leap into entrepreneurship to cure what ails you.
Having gone through this process myself, I can tell you that he has covered everything you need to know in evaluating and succeeding in a franchise business. Your net worth tells franchisors how well you manage money and how good you will be in terms of helping the franchisor build out its brand.
A decent net worth can indicate that you are smart with your money, which, hopefully indicates that you will continue that characteristic as a franchise owner. This will depend on the franchisor as well as the investment required to buy a franchise. The higher the net worth requirement, the more picky you can expect franchisors to be. They will also look at business and industry experience, how much money you can put down outside of financing to buy the business, and whether you have past experience in running a franchise.
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