Alternative Ways to Fund a Franchise

By BROOKE WYLIE Alternative Ways to Fund a Franchise Even during a recession, entrepreneurs are still opening their own businesses in pursuit of their dreams, but many wonder how they can finance these dreams when the bank lending environment remains reluctant.  With lower investment franchising opportunities looking more attractive to first-time franchisees who do not have a lot of capital, some have begun looking at alternative ways to finance their business. John Francis of Twin State Development has counseled countless franchise businesses in the service and retail industry to help them find the right franchise for them, and later ways to finance it. He too has seen more and more entrepreneurs seeking alternative financing options. “The old norm of using home equity or loans from the bank have gone away,” said Francis.  “Getting a second mortgage has become much more difficult to get and banks are more inclined to give loans for larger amounts, since it requires the same processes and paperwork as smaller loans.” While they may not be the most traditional forms of financing, as these trends show, many entrepreneurs won’t let the economy dictate whether they can make their dreams a reality. Here are a few examples of new ways that small business owners are financing lower-investment franchises: Use your 401(k) In an effort to avoid acquiring more debt, some small business owners tap into their 401(k) to pull the financing they need to start up their business. To do so, individuals set up a C corporation and establish a corporate retirement account. They can then roll outside retirement accounts into this retirement account and invest the money in the company's stock. Since the person is buying shares of their own business, they are effectively feeding it money. By doing do, no penalties or initial taxes are incurred. Private Investors When new franchisees struggle to find financing themselves, companies like BoeFly are sometimes able to step in.  Often called the “eHarmony or match.com of small business,” BoeFly matches private investors with those needing funding. The borrowers create loan packages, which includes documents such as backgrounds, tax returns, and other financial statements and lenders then sort through the loan packages and select who they’d like to help finance. Parent-Child Business Building In the wake of the job crisis in the U.S., many recent college grads have been left underemployed or without jobs at all.  To combat this, a trend has emerged of parents purchasing franchises with the goal of building the business with their children, and eventually turning it over to their children to own. No bank loan? Try a Microloan For those trying to secure a smaller loan, a microloan is an option.  Microloans are often small enough that larger banks don’t even want to bother with them, so franchisees may turn to a microlender.  There a few hundred microlenders throughout the U.S. and they offer smaller loans and typically require less paperwork than the larger banks, however they typically charge a higher interest rate than traditional loans. Each of these options may not be right for everyone, so it is important for those considering opening a franchise to discuss which is best for their particular situation with their financial consultant.  However, it is important to recognize that just because a traditional bank loan is not an option, it doesn’t mean that the door is closed on dreams of entrepreneurship.