We're going to continue on in a three-part series that will refer to the three Fs, which are fear, funding and familiarity. These are the three key things that are going to keep you from moving forward with acquiring a franchise. In the previous part, we covered fear, and here is link to check out that post. If you haven't read this post yet, you really should before or after you read this post.
The money, money, money, money. So a lot of people wonder when they come into looking at franchises when they go to the funding stage do I have to have a hundred percent of the money? And the answer to that is, no, you don't. There are some great funding opportunities out there. You do not necessarily need to have a hundred percent or even 50% for that matter, in most cases, to acquire a franchise if you are willing to look at some really great funding opportunities.
What does franchise funding entail?
You are very likely going to need and want money to fund the "business of your dreams" and it can seem a little bit overwhelming. A great analogy to think about is to think of it like getting funding for a home. If you're going out to get your dream home, you're going to need funding and you want to get pre-qualified. The reason for that is if you're going to go out and buy a home, you kind of want to know what you're qualified for, right? There's no point in looking for something that's out of your budget and out of your realm. So use that same analogy when thinking of funding the business of your dreams with a franchise.
So you need some money to acquire a franchise, but it doesn't all have to be in the bank because there are different aspects that you're going to need to fund.
You're going to need money upfront right away to pay your franchise fee
There might be a training fee
Maybe there's a build-out if you're doing a brick-and-mortar
You're also going to want to have some money for your cash flow
Money for marketing.
Some franchises can be cashflow positive from day one, but most of them are not. So you will likely need some time to get going. You're going to want some money to do your marketing, have about three months of cashflow in the bank to pay yourself or your employees as you're ramping up.
Now we hopefully understand the likely need for at least some funding to acquire a franchise.
What are some of the funding options out there available to a prospective franchisee looking to acquire a franchise?
It's good news, and it's bad news because there are so many funding options out there, so it can become completely overwhelming. We encourage our candidates to always work with a funding partner and we have some great resources that we can connect you with. We'll outlay some of the options here. Most of you have probably heard of the most common one, SBA (Small Business Administration). There are many different programs within the SBA that you can look at. Some other ones that maybe you weren't aware of would be H-E-L-O-C, which is taking money from your home equity.
There's also ROBS, which is if you have a 401K, you can take money out, penalty-free and tax-free to fund your business. But there are also personal loans, there's business loans, there's secured funding, and there's unsecured funding. So now you may see why when you start researching all the options your head would be spinning. Again, that's why we encourage you to work with a funding partner who has expertise and can guide you through looking at the different options and determine which might be work best for you.
If you are looking at a prospective franchisee, how much money should you have?
The magic number right? There is no magic number in general. We tell our candidates, that if you're serious about business ownership, you probably want to have a minimum of about $50,000 in the bank. That's because the franchise wants to make sure that you have some money to live off of, that you can pay your bills, that you can put food on the table, and that you can sustain yourself those first few months as you're ramping up. Now, some of the funding options that you may look at, like SBA, also may require a small cash infusion, let's say 10 to 20%. So that's why you're going to want to have some cash in the bank, but the majority of your funding can be from outside funding sources.
Keep in mind, that the major reason why businesses fail is undercapitalization. So when you go to get your funding, don't be afraid to ask for more than you think you need. You can typically prepay it back if you don't use it. It's better to be overfunded than underfunded.
What are some of the final nuggets of advice around funding?
There are two things to focus on, the when, and the how. So when do you start looking for these funding sources? We advise candidates to start as early as possible, learn about what the options are and start the process of pre-approval. Some of these outside funding solutions, SBA, et cetera, they can take a while to get that paperwork done. So you're going to want to start that process early.
The “how” is don't sit there and try and do it all yourself. If funding is not an area expertise then work with an outside funding partner. They're going to give you the best solutions and resources out there. Usually, there are many that you can consider.
So when you're looking at funding:
think about the when and the how
start putting your business plan together
start building the pro formas
get clarity on the numbers of what it's going to look like (you can use our handy dandy ROI Calculator to help you with this).
You will have to provide that to a funding partner anyway. Show them the money.
If you need assistance finding a funding partner to help you acquire a franchise, please reach out.
What's Your Next? - Podcast
I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.