How to Finance Your Franchise

For most aspiring entrepreneurs, securing funding is critical to starting a new business. Getting sound financial guidance from a reputable, licensed professional service can’t be underestimated. Unfortunately, many potential business owners have never opened or operated a business before and may not understand the basics of acquiring a loan. While they may have taken out a mortgage or secured a car loan, those are not analogous to securing a loan for a business.

Sometimes prospective business owners don’t ask the right lending questions or may need help knowing what questions to ask, so education is essential. Learn some of the ins and outs of how to go about getting financing for a small business or franchise.

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What are ROBS and How Can You Use Them to Fund Your Business

Named by the IRS, ROBS stands for Roll-Over as Business Startups. With a ROBS plan, you can withdraw money from your retirement funds to finance your new business without the penalty of a distribution. This typically works by first setting up a corporation and then moving those retirement funds into a new plan where that plan would invest money into the new corporation.

This type of funding works for many people, particularly those who want to avoid going the debt route and avoid taking out a loan. Using ROBS allows them to invest their own money and fund their business with their retirement funds. However, whether this is viable depends on the individual’s circumstances, as everybody has different goals and risk tolerance levels.

Using an SBA Loan to Fund Your Business

How people talk colloquially about Small Business Administration (SBA) loans can be confusing. Primarily because the SBA isn’t the one loaning individual's money; instead, they are the entity backing or guaranteeing the loan for whoever the funding source may be, whether that is a traditional bank or another lending source. However, that SBA guarantee does allow lenders to supply loans to business owners more efficiently; it helps the SBA lenders to feel more secure in those loans, and it makes it so that the business owners themselves don’t necessarily have the collateral to back up their loan as the SBA is doing that for them.

The SBA provided nearly $43 billion through small business capital programs in Fiscal Year 2022. Multiple loan options are available under the SBA, including 7(a) loans and the low-interest 504 loan program. SBA Express loans are the type of loan that many home service franchises would apply for. This type of loan typically has much shorter approval times than other loans. SBA Express Loans are generally quick and easy. Some lenders can approve these loans within 24 hours and have them funded in 30 days.

Criteria and Terms for an SBA Loan

Of course, the criteria for a loan vary based on the type and amount of the loan people are getting. Prospective business owners should keep in mind that while the SBA has its minimum requirements for funding, each lending institution will have its minimum requirements as well, which are likely to be higher than what the SBA requires. Additionally, business owners may need 10%-20% of startup costs in cash, depending on the borrowed amount.

SBA loans typically have a 10-year term. However, there’s no prepayment penalty, so borrowers can pay these loans off early if that makes sense for the business. Borrowers also need to know that these loans are generally variable-rate loans that change quarterly. While lenders can set the interest rate, they typically use a prime interest rate plus 2.75 equation and follow the prime rate when it changes.

Other Funding Options For Your Business

• Personal Loan: In addition to investment accounts and SBA loans, there are additional ways for individuals to fund their businesses. These funding methods may depend on each individual, and some options may require more or less collateral than others. For example, a prospective business owner might take out a personal loan. This loan will not be written out in the business’s name but can be used for business expenses. These loans can go as low as $25,000 and as high as $250,000, and interest rates will vary based on an individual's credit score and debt-to-income-ratio. In addition, lending options may be combined, such as ROBs with an SBA or an unsecured loan. By working with a lender, funding options can be tailored to each individual.

• Cash: For some, start-up financing isn’t needed at the outset of setting their business up. Many people also use windfall cash from an inheritance, family loan, or corporate severance toward owning a business or franchise.

Identifying the Best Funding Options For Your New Business

New and prospective business owners often need to learn what they don’t know. In fact, 42% of small business owners surveyed admit they had limited or no financial literacy before starting their businesses. New entrepreneurs must understand their options and the best way to realize their business ownership dreams. Working with a reputable lending partner or firm is an excellent way to get guidance because the firm representative can help you understand available options, including options they may only have heard about once they started this process.

Gain Insight into Financing a Franchise With Neighborly®

Deciding on a funding plan for your business or franchise idea can be a confusing but exciting time. It’s helpful for prospective owners to keep an open mind about the business models and industries they’re considering and how you might fund them. Neighborly helps potential business owners walk the path toward franchise ownership, and we have experience working with new owners and reputable lending firms to arrive at a financing arrangement that serves owners and their goals.

Be sure to check out our “Financing a Franchise 101” On-Demand session to learn more about funding a business, and be sure to download our online franchise guide today to learn more about franchising and how Neighborly can help you get on the path to success.