The Franchise Forum

Expert financial advice, content, and strategies for your franchise business

Should I take out a loan or use my home equity to finance a new franchise?

You've decided to open a new franchise location. Maybe you've already done the initial research, learning how much money you'll need to open a unit - or maybe you're still figuring exploring your options. One thing you probably realize at this stage is that it can be costly to start a new franchise unit.

Unless you have a significant amount of liquid assets, you'll likely need to apply for a loan. But what type of loan is best for you? A home equity loan may seem tantalizing because it uses collateral you already own - but there are risks involved.

Keep reading to learn about how to make the smartest lending decision for your position.

Understanding home equity loan risk

If this is your first franchise business, you may be wary to take on debt. Using your home equity to finance your stake may seem like a good idea because you're already in control of that asset, but it's important to understand the risks of doing so.

Here's an example: Let's say you need $200,000 to start a franchise and you have $150,000 in home equity. You could attempt to get the largest equity loan available - for the sake of this example, we'll assume you're able to get the full amount - and then use personal savings to cover the remaining $50,000. Once you open your business, you realize that you need additional operating capital for fees and other unexpected costs.

Unless you have other assets to leverage, it will be very difficult to secure further funding. It's not impossible, but it's a challenge you may not have time to deal with as you get your business off the ground.

Nevertheless, home equity can be a great asset to use as you look into other kinds of financing options.

"Using home equity is like using your retirement money to open a franchise."

"Equity in your home is a personal asset. You're better off getting debt in the business's name." noted Ryan Romanoff, ApplePie Capital's commercial operations manager. "It's like using your retirement money to open a franchise. You could do it, but there's a better way to get debt that's designed for business use, and that is a business loan."

Leveraging your home equity for a business loan

There is another option: Instead of using your home equity to finance your business, you could utilize that equity to qualify for a business loan.

Business loans will often cover up to 80% of the total project, so you can use equity in your home to cover your 20%.

Doing so is less risky than completely liquidating your personal assets, because the dollar amount will be smaller and the majority of the debt will be in the business name. Let's return to the previous example for a moment: Rather than taking out the full $150,000 as a home equity loan, you could take out $30,000 to cover the down payment on a business loan. This diversifies your risk and sets you up for future success. You'll retain $120,000 more of your personal home equity.

How? By holding on to most of your home's equity, you can use it again to qualify for future loans, allowing you to expand your operations faster than if you had completely liquefied your personal assets.

When you take all of the equity out of your home, it's gone. When you use a part of it for a business loan, you can do so again and again, giving you the financial freedom to build steady growth and maintain your access to financing.

Gaining trusted expertise

Before you make any decisions, gather as much information as you can. Talk to your mortgage bank about how much equity is in your home and what the interest rates would be on an equity loan. Then, talk to ApplePie Capital to discover what alternative options exist. Remember, banks don't often specialize in franchise loans, and they might not understand the market as well as a dedicated franchise financing partner like ApplePie.

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