10 Ways to Fund a Franchise

It costs $50k to $500k to buy a franchise.

Most people except Mattress Mack don't have thousands of cash stuffed under their mattresses. For everyone else, here are 10 ways to fund your franchise:

I posted about The True Cost of Buying a Franchise a few weeks ago.

In that article, I break down the five different investment levels. That's an excellent place to start understanding what's all included in that start-up cost.

A Word of Caution

Running out of cash is the number one reason businesses fail. Don’t overextend yourself. It’s better to start small and be conservative. Have cash reserves on the side. Sometimes sales don’t grow as fast as you expect. Sometimes the business is more difficult than anticipated.

Once your business starts making money, don’t go spending it!

Save that cash and reinvest it back into the business. Acquire more units, invest in marketing, and build your team. You can live an excellent life by owning a few franchises or build generational wealth by building an empire. It’s up to you.

All 10 Funding Options

Financing options can be separated into two buckets: self-funded and other people’s money. The self-funded options allow you to tap into the equity of an asset you already own vs. borrowing cash from others.

Self Funded:

1. Cash

2. HELOC

3. Stock Portfolio Loan

4. Life Insurance Loan

5. 401k Rollover

Other People’s Money:

6. In-House Financing

7. Equipment Loans

8. Unsecured Personal Loans

9. SBA Loan

10. Friends & Family

Let’s dive into the pros & cons of each one. Go here to download a free copy of the ten funding options

Self-Funded

1. Cash

Pros: no stress of debt, no loan payments, no additional interest expense. An excellent option for “low cost” franchises $50k-150k.

Cons: it takes years to accumulate, limits your opportunities, and you may need to source additional working capital

2. Home Equity Line of Credit (HELOC)

Pros: tap into your home’s equity, interest-only payments, low rates, and easy to apply. You can pay down the principal as the business starts to make money.

Cons: if you don’t have much equity (or no equity) in your house, it will limit your opportunities. The bank could not renew the line and term out loan, which will increase your payments. Worst case scenario, you could lose your house if you can’t repay it.

3. Stock Portfolio Loan

Pros: borrow up to 50% of your non-retirement stock portfolio. This is usually better than selling your stocks, paying capital gains, and missing future growth/dividends. Applying is easy, and you pay the principal as the business makes money.

Cons: your opportunities will be limited if you don’t have a big portfolio. The rates are higher than a HELOC (+2 to 3%). The biggest risk is a margin call if the value of your portfolio drops below the max LTV. Here’s how it works:

• Max Loan-to-Value (LTV): 50%

• Portfolio Value: $200k

• Max Loan = $100k ($200k x 50%)

If the portfolio drops 10% to $180k, the new max loan is $90k.

If you maxed out & borrowed $100k, you would get a margin call for $10k. You must deposit $10k, or they will recoup by selling your stocks and taking the proceeds.

You would not get a margin call if you only borrowed $80k since you’d still be above the $90k max loan. Reach out to your brokerage firm (Vanguard, Fidelity, etc.) to enable.

4. Life Insurance Loan

Pros: borrow up to 100% of a whole life insurance policy's cash value, interest-only payments and great rates (Penn Mutual is 5.70% right now). There’s no timetable requirement to repay the principal since the insurance company has a guaranteed payment upon your death.

Cons: it takes years to build the cash value, and if you don’t have a lot it will limit your opportunities.

P.S. I’m a huge fan of the “infinite banking strategy” where you treat a whole life insurance policy like a savings account. It earns 4-5%, access to the cash through a loan, it’s protected from creditors, and the death benefits can go to your kids tax-free.

Email me if you’d like a referral for one of the best guys in the space who set up policies for my entire family.

5. 401k Rollover

Pros: Only applicable if you have a 401k and are quitting your job to start the franchise. There are no early withdrawal penalties if done correctly. This is a great option for people who want to bet on themselves instead of on the stock market.

Cons: This process can be complicated, so you must use an experienced company. You have to use a C-corp entity that has some additional tax & administrative costs.

401k Rollover Companies

• Fran Fund

• Benetrends

• Tenant Financial

Other People’s Money

6. In-House Financing

Pros: Franchisor offers in-house financing for franchise fees &/or equipment. Very easy & quick. No banks are involved. Usually reasonable interest rates.

Cons: Pre-defined terms that apply to everyone. It may be a shorter term with higher payments compared to other options. Defaulting on the loan = defaulting on the franchise.

7. Equipment Loans

Pros: Great option for equipment-based franchises (dumpsters/trucks/vans). Easy application & approval process since the franchisor usually has an existing relationship with the lender

Cons: Only for equipment. No franchise fee, working capital, or other start-up costs. Rates & terms are based on your credit, and equipment as collateral. If you default on loan, they repose equipment & you are out of business.

8. Unsecured Personal Loans

Pros: Use funds for any purpose. No collateral required is the biggest benefit Must have excellent credit (700+), reliable income, no missed payments

Cons: Higher fees & rates given the increased risk for the lender.

Lender: American Business Credit  

9. SBA Loans

Pros: Finance 70% for start-up (90% for established cash flow). Include equipment, franchise fee, build-out, marketing budget, & working capital. 10-year term and rate based on WS Prime

Cons: additional paperwork, putting up collateral equal to the loan amount (your home), restrictions & prepayment penalties

Franchise-Friendly SBA Lenders & Brokers:

• Live Oak Bank 

• Fran Fund

• Benetrends

• Tenant Financial

10. Friends & Family

Pros: structure as equity or debt; you set the terms. No banks or credit checks

Cons: Hustle to raise the money, unwanted partners who demand updates & payments. Drain cash from the business to pay back quicker and at a premium. Destroy relationships

Combine Multiple Sources

Dumpster Rentals

• $75k Cash

• $35k In-House Franchise Fee

• $200k Equipment Lender

• = $310 Total Investment

House Cleaning

• $50k Cash

• $75k Stock Portfolio Loan (30% of $250k value)

• = $125k Total Investment

Residential Painting

• $20k HELOC

• $65k Unsecured Personal Loan

• = $85k Total Investment

Water Remediation

• $50k Life Insurance Loan

• $50k HELOC

• $200k SBA Loan

• = $300k Total Investment

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Every Friday on my podcast, Business with Beers, I feature an episode on franchising.

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