There are several common ways to fund a franchise: your own cash, an SBA-backed loan, financing the franchisor offers or arranges, a retirement rollover known as a Rollover for Business StartUps or ROBS, a HELOC or home equity line of credit, or a SBLOC or Securities Backed line of credit. Plenty of candidates combine two or three of them.
Knowing the options is the easy part. The real question is which mix fits the franchise you want and the life you’re trying to build. Misjudge the money side and you can disqualify yourself from something you could actually do. Or you could decide to start underfunded and put the whole thing at risk before it has a chance.
Start with two numbers, not one
Before you think about loans, separate two numbers.
Your total investment is what it takes to open the business and carry it until it supports itself. Item 7 of the Franchise Disclosure Document gives you the franchisor’s estimated range, including working capital for the first several months of operation. Read the fine print and check how many months that covers, because your ramp-up may take longer.
Your liquid capital is the cash, or assets you can turn into cash quickly, that you bring to the table yourself. Most franchisors set a minimum, and it’s usually separate from your total investment. If you want the full breakdown, here’s what liquid capital is and how much you need.
Financing is how you close the gap between the two.
Plan past opening day, too. Marketing to fill the calendar, a second vehicle, your first hire. Those are growth costs, and a good financing plan covers building the business, not just opening it.
SBA loans
The Small Business Administration doesn’t lend you money directly. It backs a portion of a loan made by a participating lender. That makes the lender more willing to finance a new business with no operating history. For franchises, that could be the 7(a) loan program or the 504 loan program (for longer term, fixed assets like buildings and heavy equipment).
There are two things to know going in.
First, ask whether the brand is listed on the SBA Franchise Directory. Lenders check it, and a brand that isn’t listed can cause your funding to stumble.
Second, talk to more than one SBA lender. Rates and terms vary, and the first offer isn’t automatically the best one. Generally speaking, a reduction in interest rate can translate to an increase in fees.
You’ll still need to put some of your own money in, and the lender will want to see a plan built on the franchise’s real numbers.
Financing through the franchisor
Some franchisors offer financing directly or work with preferred lenders who already know the brand. That can make approval faster. Item 10 of the FDD tells you what financing the franchisor offers or arranges, if any.
A preferred lender is a starting point, not an obligation. Compare their terms with at least one outside lender before you decide.
Using your retirement savings
If most of your savings sits in a 401(k) or IRA, you have more options than you might think. Many 401(k) plans let you borrow against your balance, though IRAs don’t allow loans. Certain programs also let you put retirement funds to work in a business without any taxes or penalties, as long as they’re set up correctly. The best known is the Rollover for Business Startups, usually called ROBS.
ROBS is legal, and it’s been around for more than 50 years, but it isn’t a do-it-yourself project. It requires setting your business up as a C corporation, and it comes with ongoing compliance rules. Use a qualified ROBS provider/custodian and bring your accountant in from the start.
Be honest about the trade. Your retirement savings become tied to the business. That can be the right call. It shouldn’t be the automatic one just because the money is sitting there.
Home equity
A home equity line of credit can come with a lower rate than an unsecured loan. The trade is obvious, though. Your house is part of the deal.
If you go this way, have a clear-eyed conversation with your financial planner first. Know what happens if the business ramps up slower than you’d like.
Putting the mix together
A mix often looks like this: some cash covers the liquid capital requirement, an SBA loan covers the bulk of the investment, and sometimes a ROBS contribution or a home equity line closes the gap.
The lowest placement I’ve ever done started with $15,000 in cash and a $50,000 loan. Real opportunities exist across a wide range of investment levels, and financing is a big part of why.
The right mix depends on your credit, how much cash you want in reserve, and how much risk you’re comfortable carrying. There’s no single right answer. There’s the right answer for you.
Get nosy about the money
The best financing research you’ll do isn’t on a lender’s website. It’s on the phone with people who already own the franchise.
My rule is at least three owners before you rule out a brand and at least five before you say yes. On those calls, ask how they funded their start, what they’d do differently, and what the second year cost them. You’ll learn more from those answers than from any estimate.
Start early, too. Bring financing into the conversation while you’re still narrowing your list, not after you’ve fallen for one brand. The earlier it starts, the more options stay open.
Where I fit
I’m an independent franchise consultant, and I work with candidates nationwide. I don’t lend money, and your lender, accountant, and financial planner handle the specifics. My job is to help you figure out what you want your life to look like first. Then we find franchises whose investment range and liquid capital requirements actually fit, so every financing conversation starts with the right numbers. Here’s more on what a franchise consultant does.
Working with me costs nothing. I’m paid by the franchisor when a placement is made, and I’m paid the same regardless of your investment. Your net expense to work with me is zero. You never pay me a dime.
Where to start
Finding a franchise is easy. Finding the right one for you is not.
If you want to see which types of franchises fit your goals and your budget, take the quiz. It’s a few minutes, and it gets us to a real conversation faster than anything else.
Rather talk it through first? Reach out through the contact form and we’ll set up a free 15-minute consultation. I’ll talk to anybody anywhere about franchising.
Matt Stevens Independent Franchise Consultant, The Franchise Guy
Nearly 40 Years in Franchising | 4 Businesses Owned | Nearly 1,000 Franchisees Placed | heisthefranchiseguy.com
Matt Stevens has spent nearly 40 years in franchising. He’s helped more than 3,000 people explore franchise ownership and placed nearly 1,000 of them as franchisees across more than 40 states. He has owned four businesses and served as Vice President and Partner in a $2 billion international franchise holding company. He works as an independent franchise consultant based in Dublin, Ohio, and his consulting is free to the candidate. Learn more about Matt
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Frequently Asked Questions
The most common sources are your own cash, SBA-backed loans, financing the franchisor offers or arranges, a Rollover for Business Startups (ROBS) using retirement funds, home equity, and security-backed loans. Many candidates combine two or three. The right mix depends on the franchise’s total investment, its liquid capital requirement, your credit, and how much debt you’re comfortable carrying.
Total investment is what it costs to open the business and carry it until it supports itself. Item 7 of the Franchise Disclosure Document gives the franchisor’s estimate, including working capital for the first months of operation. Liquid capital is the cash, or quickly accessible assets, you bring yourself. Most franchisors set a minimum, and it’s usually separate from the total investment. Financing covers the gap.
Often, yes. The SBA backs a portion of loans made by participating lenders, usually through the 7(a) program. You’ll still need to put in some of your own money and bring a plan built on the franchise’s real numbers.
Few do, either directly or through preferred lenders who know the brand. Item 10 of the FDD tells you what financing the franchisor offers or arranges, if any. Treat a preferred lender as a starting point and compare their terms with at least one outside lender.
Yes, in a couple of ways. Many 401(k) plans allow loans against your balance, though IRAs don’t. Certain programs, the best known being ROBS, let you put retirement funds to work in a business without any taxes or penalties when they’re set up correctly. ROBS requires a C corporation and a qualified custodian, and it ties your retirement plan to the business, so weigh it carefully.
It can be. A home equity line may carry a lower rate than an unsecured loan, but it puts your home on the line if the business underperforms. Talk it through with your financial planner before you commit.
Early, while you’re still narrowing your list. If financing waits until after you’ve fallen for one brand, you’ll have fewer options and less time to compare lenders.
Not with me. I’m paid by the franchisor when a placement is made, and I’m paid the same regardless of your investment. Your net expense is zero. Nothing about how I’m paid pushes you toward a bigger number or a particular way of funding it.
Ready to Find the Right Franchise for You?
Matt Stevens | The Franchise Guy | Dublin, OH 43016
Call: (614) 595-3726
