How to raise funds to buy into your chosen franchise
When you want to buy into one of the many franchise opportunities you have to put in some money to the franchisor. This investment money is to buy the rights of the franchise, to use their branding and support in order to establish your new franchise business in a specific area. The money to buy into a franchise can be very high (or lower than you might think – check out a list of cheap franchises) and you might not have the funds handy.
So, how can you raise the funds for your franchise? Here are six options for you.
1. Franchisor financing
The first place you should look for finance for your franchise is the prospective franchisor. Many of them offer financing solutions that are designed to help franchisees come up with the funds. There are different ways that these are offered. Some may front the money themselves, with an agreement that you pay back the ‘loan’ as extra to your monthly contributions.
Alternatively, you might get access to lender partners they might work with. This option has several benefits. For one, often the amount of financing agreed can cover set costs such as equipment and marketing materials. Another benefit is that they will know exactly how much you will need and be able to speak to you about optimising your spending so you get the equipment/materials you need at the best prices.
If you do speak to a franchisor who offers these financial plans for new franchisees, then you’re unlikely to need to raise any more funds. And you can often come to an agreement about repayments that can be scaled according to your current profit levels, without leaving you short of living expenses from the profits of the business.
2. Bank loans
Another way to raise the funds for your new venture is to speak to your bank and see if you can arrange a commercial bank loan. When you apply for a commercial bank loan, you will need to prove that there is a business to have, your expected profit levels and proof that you can repay the loan. You will also need to show a business plan and your personal credit history.
The stronger your financial history, the more chance you have of securing the loan. All loans will need monthly repayments, regardless of how much you’re making. And you might need to pay a high interest rate on the loan. This can make this option very expensive.
Check out some approved franchise banks.
3. Alternative lenders
Alternative lenders are a quick way to secure additional capital for franchise opportunities. Alternative lenders don’t have the most stringent requirements for lending and they have quick turnarounds. There are often lots of loan options that can help you buy into your new franchise or buy the equipment you need for them.
Of course, these types of loans might come at a cost. The rates of interest are often higher than other forms of credit and the loan terms can be rather short. Therefore, in the short term, it may be very expensive.
Crowdfunding is a very new and very exciting option for financing, but it isn’t a guaranteed source of income. Crowdfunding is when you start a marketing campaign to get other people to invest in small amounts of cash. These backers are promised rewards for participating in the efforts to raise money for the venture.
The idea is that lots of people putting in just a little bit of money leads to the whole funding amount needed. However, you’ve only got a set amount of time to reach the funding goal. If you don’t meet your funding goal, then you don’t get any of the money that has been pledged to you by backers. Therefore, this can be a risky method.
5. Friends and family
Sometimes, the best place to get the money for the franchise fee is to borrow the money from your friends and family. You can take the money in two ways: as a loan that you will pay back or as a gift. Alternatively, you can bring a member of the family onboard to the new venture where they put up the money and you bring the expertise.
There are some challenges with this option as if there are financial issues this could put a strain on the relationship. Therefore, you might want to draw up a professional contract when working with a family member or a friend.
6. Life savings
One of the final options is to consider using your life savings. This might be a good option if you have a good reserve and are confident of getting your investment back. It also means that you’re not having to spend more money by having to pay interest on top of the money you’ve borrowed from your life savings.
Raising funds for your franchise can be tough. However, there are six options above that can help you raise the funds necessary. Everything from using your savings to asking friends and family for the money. Consider carefully what options are best suited for your franchise and financial situation.