How to Buy a Franchise Business (Part 4)

Part 4: Financing a Franchise

Step 1: Consider franchisor financing. The franchisor might be willing to finance the start-up costs of opening the franchise. They may either extend a loan directly or help you get a loan from a bank the franchisor has a relationship with.
•    You want to check the terms of the loan—interest rate, repayment period, etc.
•    Also investigate how much of a down payment they require. Some franchisors might require 25% or more as a down payment.

Step 2: Research bank or credit union loans. You can talk to banks or credit unions about whether they lend to franchisees. Their willingness to lend will often depend on which franchise you are opening. If the franchisor is established and profitable, then you are more likely to get a loan. To check about bank financing, pull together the following financial information:
•    your credit scores
•    personal financial information
•    tax returns
•    information about how you will make your down payment

Step 3: Look into SBA loans. The Small Business Administration doesn’t make direct loans. However, they will guarantee a portion of a loan if you qualify. By guaranteeing the loan, they agree to pay a bank a portion of it should you default. About 10% of all SBA loans are given to franchisees, in amounts usually ranging from $250,000 to $500,000.
•    You could possibly qualify for an SBA loan if the franchise is listed on the SBA’s Franchise Registry of Approved Brands: https://www.sba.gov/content/franchise-registry-approved-brands.

Step 4: Come up with other sources of financing. If bank loans or franchise financing are not available, you have other options. You should talk about each with an accountant so that you understand the pros and cons.
•    For example, you could use money in a retirement account. You would set up a C corporation that will own the franchise and roll money over into the C corporation’s profit-sharing plan. This type of financing puts your retirement at risk, however.
•    Alternately, you could get a Home Equity Line of Credit or take out a second mortgage. By financing this way, you put in jeopardy ownership of your house.

(To be continued)

Source: https://www.wikihow.com/Buy-a-Franchise-Business