Jim Judy

Jim Judy

Franchise Business Consultant

Monthly Archives: May 2018


finance a franchise

Four Ways to Finance a Franchise

Franchise business ownership is an exciting way to live your life goals and dreams, but too often, aspiring franchisees fail to even make that first phone call because of one major concern:

 

How can I afford my own franchise business?

 

It’s no surprise that money is usually at the top of people’s lists of reasons not to pursue their entrepreneurial dreams. What is surprising is how often people assume they don’t have the means to launch their own franchise without knowing all of their options.

 

With the help of my friend Steve Nilssen at Guidant Financial, we put together a list of some of the most popular ways that franchise candidates can finance a franchise.

 

Rollover for Business Startup – This is the most popular way for people to finance a franchise. Instead of taking out a loan, they finance the franchise themselves using money they’ve saved in their 401(k). Essentially, a new business is established as a C Corporation. That C Corp creates a new 401(k) plan that can purchase private stock. Funds from the candidate’s 401(k) are “rolled” into the new 401(k) plan without triggering a taxable distribution. The 401(k) plan can then purchase stock in the C Corp, otherwise known as your new franchise. The funds used to purchase the stock are used to acquire or start your new cash-rich and debt-free business!

 

This works not only with a 401(k), but also a traditional IRA, 403(b), Keogh, SEP or TSP. Just be sure to use a professional to set up a Rollover for Business Startup so as not to miss a step and trigger a taxable distribution that could cost you thousands of dollars!

 

Small Business Administration (SBA) Loans – While these used to be far more labor intensive to secure, the SBA has recently taken steps to make it much easier for franchise candidates to acquire funds in order to purchase a franchise. Effective January 1, 2018, franchise businesses can become pre-approved for financing from the SBA. That means a franchise candidate no longer has to prove the viability of the franchise business they are hoping to purchase if the franchise is on the pre-approved list. It doesn’t relieve the burden of the candidate to personally show worthiness for the loan, but no longer needing to prove the worthiness of the business as well drastically reduces the burden on the candidate.

 

Nilssen reports that 45 percent of their clients use a combination of an SBA loan and Rollover to Business Startup in order to finance their franchise businesses, so there’s a good chance that those two methods of financing will help you launch your small business. However, there are a few other ways to secure financing worth mentioning.

 

Portfolio Loans – This allows candidates to borrow up to 80 percent of the value of their stocks, bonds and mutual funds. Unlike traditional loans, this type of loan is brokered out as an interest-only loan, currently set around 4 percent. There are no upfront costs and loans like this generally close within 10 days. Just keep in mind that the loan broker has collateralized your portfolio, so you can’t withdraw the funds or fall below the 80 percent loan-to-value ratio.

 

Cash-out Refinance – This is a way to collateralize the value of your home by refinancing your mortgage for more than the current outstanding balance, then keeping the difference between the old and new loans. For example, let’s say you owned a home valued at $300,000 but still owed $100,000. If you needed $100,000 to launch your franchise business, you could refinance your mortgage at $200,000 and use the extra $100,000 for your business. This model is a great way to improve your debt profile and secure a more stable rate, but the cash-out rate will likely be a bit higher.

 

If you’d like to know more about your financing options, please give me a call at 919.846.7111 or jjudy@franchoice.com.