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Top Four Financing Options to Fund a Franchise

February 22, 2021

By Brandon Clifford, Vice President of Franchise Development

Of all the questions I face from franchise candidates, the ones I am asked the most often revolve around funding.

“How do most people pay for a franchise?”

“What is the minimum investment?”

“Is funding available?”

“What are the requirements to get financing?”

“How much cash will I need?”

Once you have completed the Discovery process and we have awarded you a HomeWell Franchise, financing your new venture is the next step. Many people will dip into their personal cash reserves to start, and then ask friends and family for help or apply for credit cards. However, what do you do when that is not enough, or you just don’t like those options? The following show four different ways that business owners can finance their new business ventures, and what it takes to qualify for each.

SBA Business Loans

SBA loans from the Small Business Administration (SBA) are one of the most common forms of small business financing. They provide up to $5 million in financing, which can be used for almost any business purpose, including start-up, acquisition, and expansion costs. The SBA encourages banks to lend to small businesses, and in exchange they guarantee 75 – 85 percent of a loan.

Pros:

  • SBA loans are extremely cost effective. With low interest rates, extended repayment terms and no ballooning costs, SBA loans offer affordable repayment options for business owners at all stages.
  • SBA loans are also flexible. Loan proceeds can be used as working capital, revolving funds, or to purchase real estate, equipment, inventory, etc.
  • With budget-friendly monthly payments, you’ll have more money to put back in your business helping to grow your business.

Cons:

  • There is a long lead time to be approved for a loan. The SBA loan process usually takes a minimum of six weeks for approval. Applying for a loan on your own can be even more time consuming as you’ll need to fill out multiple applications and gather a multitude of documents. It’s advisable to work with a broker that can help you streamline the process and has relationships with lenders in place.

Eligibility Requirements:

  • Down payment – 20 percent down payment for an existing business purchase or 30 percent for a startup.
  • A credit score of 640+.
  • Personal collateral is required.
  • Industry experience is preferred.
  • Secondary income is preferred.

401(K) Business Funding (Rollovers for Business Start-ups)

One of the most popular forms of equity financing is the Rollover for Business Start-Up (ROBS) arrangement. ROBS allows entrepreneurs to roll money from a 401(k), IRA or other eligible retirement account to start a new business or purchase an existing business or franchise. As a part of the structure, the new corporation sponsors a 401(k) plan, allowing you and your employees to continue to save for retirement.

Pros:

  • A quicker path to profitability. Because the ROBS structure is not a loan, no monthly payments or interest rates are involved, allowing you to make money faster.
  • Easy to qualify. There are no collateral or minimum credit score requirements, which make qualifying extremely simple. If you have $50,000 in a rollable retirement account, you’re eligible to use ROBS.
  • Control of your retirement funds. Unlike the stock market, ROBS allows you to direct your retirement funds to your business’s benefit, and you don’t need to worry about market volatility.

Cons:

  • Ongoing requirements. As a part of the ROBS structure, your corporation must sponsor a 401(k) plan. Though this is a competitive benefit for you and your employees, it does require annual filings with the IRS and DOL.
  • Risking retirement. Though investing your retirement funds in the stock market is never a sure bet, some entrepreneurs are not comfortable with the idea of alternatively using their retirement funds to start a small business. If the business fails, you risk losing part or all of your nest egg.

Eligibility Requirements:

  • At least $50,000 in a rollable retirement account.
  • No minimum credit score requirements.
  • No down payment needed.

Home Equity Line of Credit (HELOC)

Some business owners choose to use the equity in their home to gain capital for their ventures. Home Equity Lines of Credit act like a credit card in which you have access to a revolving balance and pay interest only on what you use. Interest rates usually vary over time based on prime.

 Pros:

  • Easy to qualify. Given you have equity in your home, acceptable credit, and a means to pay back the loan, HELOCs are fairly easy to obtain compared to traditional business loans.
  • Affordable debt. Interest rates for HELOCs are usually significantly lower than rates for other loans, and the interest you pay is tax deductible.
  • Great for working capital. Since HELOCs offer access to a revolving line of credit at any given time, they’re an affordable option to get over a momentary rough patch in cash flow.

Cons:

  • You risk your home. Should you default on repaying your balance in a timely manner, you’re at risk of losing your home.
  • Hidden costs and fees. HELOCs usually come with closing costs, attorney fees, loan processing fees, and sometimes inactivity fees and early repayment fees.

Eligibility Requirements:

  • At least 15% equity in home.
  • A credit score of 660+.
  • Credit utilization below 45%.

Unsecured Loans

Unsecured loans provide a fast, alternative method of financing that don’t require any collateral to qualify. You can secure up to $150,000 without risking personal property. These loans are based solely on creditworthiness, so it’s best for those who have a healthy credit history and score.

Pros:

  • Keep personal assets safe. There’s no need to need to risk your home or other property to secure the loan.
  • Quick funding. Secure your funding using unsecured loans in only a few weeks.
  • There are no restrictions on what funds from an unsecured loan can be used for.
  • Low introductory rates. Interest rates begin at 0-3 percent for the first year, making it a great short term financing option.

Cons:

  • Increase in rates. After the first year, the interest rates for unsecured loans will rise, making them a less than ideal option if you won’t have the cash flow to pay it back quickly.
  • Requires a credit score of 690+. Because unsecured loans aren’t backed with property, they do require excellent credit scores to qualify.

Eligibility Requirements:

  • 690+ credit score
  • Credit utilization rate below 50%
  • Minimal recent credit inquiries
  • No recent derogatory comments on your credit report

There are many options to funding a new business venture. Our Franchise Development team have advised many potential owners on the options. We’ve also assisted new owners in connecting them with a preferred lender. The investment in home care is low and the returns can be high. Contact us today to find out more.