Financing Options Can Open Franchise Opportunities

You picked the right franchise but now how do you fund it?

When you’re making a large purchase like a car, home or business you will find financing options out there to suit your needs, timeline and repayment abilities. VERY few people pay for their car, home or business with straight cash -- most finance. An OpenDoor Franchises Agent can help you find the right financing options for you:

1. SBA(Small Business Administration) Express and 7(a) loan: The SBA’s mission is to help entrepreneurs start or grow their business, and an SBA loan may provide the longest-term and lowest-interest loan available for your business. The most common one for small business owners is the 7(a) program, which is more generally focused on helping small businesses start and grow.

How it works: The SBA does not directly lend money to business owners. Instead, small business owners secure an SBA loan through an authorized SBA lender (such as a bank), and the SBA provides the bank a guarantee for a portion of the loan; thereby mitigating some of the risk and incentivizing financial institutions to lend money to small businesses.

  • Lower down payments

  • Typically offer more attractive payment terms and interest rates than other types of loans

  • Funding available from $5,000 to $5 million (only nonprofits can offer microloans under $50,000)

  • Collateral of 10%-30% typically required (Note: ROBS/401(k) rollover funding can be used to satisfy this requirement)

  • Typical loan terms of 7-10 years, up to 25 years available if the project involves real estate (this is generally longer than conventional loans)

  • No prepayment penalty

2. 401(k) and IRA Rollover: A rollover for business startups (ROBS) is a way to invest funds from your retirement account — like a 401(k) or individual retirement account (IRA) — into your business without paying early withdrawal penalties or taxes. A ROBS isn’t a business loan or a 401(k) loan, so there’s no debt to repay or interest payments to make.

How it works: A ROBS is a popular way to start or buy a franchise. A ROBS gives you access to your retirement funds to use in your business without having to borrow or cash it out. It can be used to fund a new franchise, buy an existing business or recapitalize your business. When you use a ROBS, your business retirement account owns shares of your new business. A ROBS 401(k) involves incorporating a new business and opening a new 401(k) under it. After setup is complete, you can transfer assets in from other retirement accounts and invest those funds directly in your new business.

3. Conventional Loan: Conventional loans can be provided by bank and non-bank lenders, but are not guaranteed by the SBA or other government entity. Any small business or franchise can apply; however, they can be difficult to obtain for startup businesses. Approval depends largely on the overall credit risk of the business.

How it works: With conventional loans, the interest rate, term length, and loan amount depend on your credit rating and business revenues. Some of the most popular conventional loans include term loans and commercial real estate mortgages. The lender, whether it’s a big bank, community bank, credit union or other type, will typically require you to share an extensive amount of financial information including: personal credit history, the financial background of the business, future growth plans, and any other relevant information.

  • Shorter closing times than SBA loans, in most cases

  • Several options are available: term loans, commercial real estate mortgages, factoring, etc.

  • Suitable for a wide range of business purposes (there is a little more freedom on what  you can do with the money)

  • If successful in securing a loan, it becomes easier to get loans renewed or increased

4. Securities Backed Line of Credit: This type of loan is backed by securities held in an investment portfolio. It is similar in concept to a home equity loan, but rather than the loan being backed by the equity in your home, it is backed by the securities held in your investment portfolio.

How it works: Whether you want to launch a new business, expand one you already have, or utilize a bridge loan, this type of funding can provide you with the immediate funds to do so by allowing you to collateralize your investment portfolio, without disrupting your long-term investments or asset allocations or creating unexpected tax consequences. This type of funding is a popular option because rather than selling stocks to buy a business, you can simply borrow against them, and generally pay only 2-4% interest.

  • Cash needs are satisfied without selling securities/assets/investments

  • Avoid selling stocks and generating capital gains

  • You keep all appreciation and dividends from your portfolio

  • Ability to borrow 70%-95% of investment portfolio

  • Keep your long-term investment strategy in place, with all investments remaining in your name

  • Easier to obtain and have lower rates than other alternatives (SBA loan, unsecured loan, and other forms of credit)

  • Typically receive approval within 48 hours and are fully funded within 10 days

5. Home Equity Loans: Although becoming less common, some entrepreneurs still rely on their biggest asset for cash – the equity in their homes – to finance a franchise or business purchase.

How it works: Home equity loans remain relatively easy to obtain, assuming you have the required equity in your home, as well as good credit and income for repayment – but the requirements have tightened up recently. There are two types of home equity loans: a standard home equity loan that is just like a regular mortgage in that you borrow a single lump sum and repay at a fixed monthly rate; and a home equity line of credit (HELOC), where you have access to borrow smaller funds—when needed—up to a predetermined fixed amount. The best option for business owners depends on the type of business or franchise you choose.

  • Interest is most likely tax deductible, but cannot be used as a business expense

  • Easier process and lower interest rates than other non-secured options

Your OpenDoor Franchises Agent would be happy to talk to you about any of these options today!

Jeremiah Marquis