The Franchise Forum

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

Why should I borrow money for my franchise business?

Franchising offers you the opportunity to start your own small business with the support of a brand name and proven business model. However, as with any small business, starting a franchise requires capital.

The question is where this capital comes from.

"It really depends on the person," says Jack Winfield, a franchise finance specialist at ApplePie Capital. "There will be people who have the cash in the bank to [open a franchise business without borrowing money]. There will be people who have equity in their homes and take out a mortgage to take the money out. There will be people who might borrow against their 401k. There are a number of ways to open a franchise using your own resources."

Make sure you have a financial cushion

While various reports have shown franchises have a higher success rate when compared to typical small businesses - 42 percent higher by one account - opening a business always presents a risk and self-funding means taking on 100 percent of the risk. Unless you have considerable financial resources, odds are it's a safer financial decision to borrow money when starting a new franchise business.

Loans come with their own costs, chief among them the interest you pay, yet they provide a safety net that keeps more of your personal resources available. In short, it's strategically sound to ensure you have a financial cushion in place should the worst occur. Those that self-finance may find themselves not only with a failing franchise business, but the entirety of their retirement savings gone, as well.

"If your franchise goes under, you're still on the line for the loan, but you'll also still have your own resources," Jack says. "There are protections under the law that won't allow lenders to take certain assets."

"Make sure you've got the liquidity to weather the initial opening of the business."

Examine your options

In order to avoid financial difficulty, Jack recommends being conservative and preserving liquidity in case things get tough.

"Part of that is making sure you've got the liquidity to weather the initial opening of the business, which, historically for small businesses, is going to be the period when most businesses fail," he says. "If you're not able to get over that first six months, you're going to be in trouble. And if you're looking for financing options at that point, it's akin to having your home on fire and looking for fire insurance."

There are numerous lending options available, including conventional bank loans, SBA loans and alternative loan products. What's really most important is working with a lender that makes your success a primary focus.

When making a selection, start with your brand. Most brands typically have a list of preferred lenders they can introduce to franchisees. Still others have funds in place to guarantee loans, making it easier for a borrower to qualify. It's also possible a brand may reduce its initial franchise fees to assist a borrower with startup costs.

Forgoing franchise loans can leave you financially vulnerable.

Weigh your choices

It's important to compare both franchise start-up costs and loan options when conducting your due diligence. Understand exactly how much opening a franchise business will cost, and don't underestimate what it will take to be successful.

And if you do choose to borrow capital to start your business, make sure your  your loan aligns with your plans,  particularly if you intend to open multiple locations.

No matter your final selection, it's essential to understand how a financial decision you make today may impact your ability to grow your franchise tomorrow. Every option comes with unique risks and rewards. Determine which path makes the most sense for your finances and overarching business objectives.

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