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Buy a Franchise: How to Finance Your Purchase

franchise financing

Franchise financing

Finally, the search is over – you have done your homework and have found your dream franchise and you just know it has a bright future. The next step would be: buy the franchise; the big question: how will you finance the purchase?

Unfortunately, franchises are stereotypically known as businesses requiring quite an amount of investment and cash – something that not many of us have. Don’t lose hope, though – as an entrepreneur and business owner, you must acquire the all-important skill: the ability to leverage other people’s money (OPM) for your business purchase. Let us explore what options you have to fund your purchase (a hint: mix-and-match will do good):

Your own money

If you are blessed with a business capital of your own, be sure about one thing: what you see is NOT the whole picture. Franchise opportunities are offered “as is,” meaning that they usually exclude property lease expenses, cash needed for the startup phase (yes, a franchise unit IS a business startup – you’ll lose money until you break even, unless what you buy is a franchise resale,) any interests incurred from your business financing activities, etc.

My simple rule of thumb in any business investment: Double the amount of fund to be prepared to start or buy a business. For instance, if you are going to buy a $10,000 franchise, be sure to have $20,000 ready.

Financial institution financing

Bank loans are typically the way to go if you are looking at affordable financing. Unfortunately, most bank loans are secured loans, meaning you need to present collateral to back your loan. A personal guarantee that requires no collateral can be made available only if you are a reputable debtor with a squeaky-clean credit track record. The good news is, most banks are willing to finance established franchises as they have a proven track record and business system.

What about credit cards? Well, some entrepreneurs I know fund their business startup with credit cards, but due to the relatively high interest rates this is not recommended. What about unsecured loans? Well, hear me this: stay away from those loans if you are going to use them as franchise purchase capital! The interest rates are outrageous and this will only burden your franchise business operation later on.

Franchisor financing

Some franchisors offer partial financing (a select few even fund 100% of your purchase!) to help you out in your startup process. However, bear this in mind: Your franchisor’s willingness to finance your franchise purchase doesn’t mean your franchisor will easily accept your application. You still need to do your due diligence and prove to your franchisor that you will be a great franchisee.

Other financing options

A loan from Small Business Administration can be a great additional financing for you. Private investors (which include family and friends) can also be a great source of financing – just make sure you have the loan terms written to avoid problems later on (and believe me, problems with private investors are more devastating, indeed.)

Ivan Widjaya
Franchise purchase financing
Image by alancleaver_2000.

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