How to finance a franchise

If you write a personal check, use the equity in your home, use the 401K money or get a commercial loan, one way or another, is funding the franchise. Funding in the right way is critical to the long-term success. It may not be as critical as finding the right locations, but close.

In general, financing your franchise business, you have three basic options:



Option I: finance it from his own pocket, with a check or savings, cashing out retirement savings, or other means,

Option II: Taking a loan secured by your personal assets, such as a loan or an SBA loan, or

Option III: a loan to finance commercial business franchise.
Each option has its pros and cons. The best option for you is based on several factors, including the goals you have for your new business. One possibility might be better if your goal is to open one place to another if your goal is to open several in a given time frame. What follows is a discussion of various options and how they might or might not be the best for you. Our goal is to help you make the best decision possible based on the current situation and your goals. Franchise Financing Options Option I: Loans out of pocket if the goal is to open one location and have the cash to open it and get it to profitability, this is not a bad choice. You will lose the accrued interest on your money, but avoid the cost of interest on the loan. If you plan to open more than one location and have the resources to get them all to return, again, this may not be a bad choice.

However, if you have the resources to open the first position, and plan to rely on the use of cash flow the first to open the second, third, etc., be careful. Remember, if you have money in the bank or equity in your personal assets, you can always use that capital for business expansions or later. If you intend to rely on commercial financing at any time, funding, the first is what gives you maximum flexibility.

This is the downside of this option. Having your personal money tied up in a business limits the flexibility in the future. It may or may not be able to take advantage of a future opportunities when it arrives. Many books are available that discuss the value of using OPM (other people's money) on opening and growing a successful business.

Option II: Taking a loan secured by your personal property This option provides greater flexibility than Option I. your liquidity remain liquid, giving the opportunity to meet the needs of the changing business needs. The net, after tax difference between interest income and interest paid may be low, making this a viable alternative to I. Option

The downside of this option is available in two forms: (1) mobilization of personal property pledge, and (2) the true overall cost of financing.

Tie your personal property limit your choice and flexibility for the future. As an example, we recently funded a second path for a certain franchisees. He took out a SBA loan for his first position with his home of a security. He knew that the service was also filing a lien against his first position, but nobody thought that this would be a problem since we planned to secure our loan with only his new position.

What we discovered during the title search is that, when the original creditor filed a lien against the selling of their franchisees, they listed the path were included funding and the phrase "all future positions" as security deposit. These three little words meant that all positions and all that franchisees would be opened at any time in the future, were considered to be security against the original loan! We were finally able to solve this, but need to negotiate a subordination agreement with the original creditor.

The lesson is to be very careful about what the lender actually used as collateral for the loan because it could limit your options for the future.

In terms of true, all-in cost of funding, this can be a complex subject. Unfortunately, some lenders prefer it. They quote a low interest rate, but not the points and loan fees involved. They will not have the time to educate the borrower about the differences between floating-rate loan and fixed-rate loan. They do not fully disclose all charges that are incurred during the life of the loan.

The lesson is to have everything in writing and review with a lawyer. The more reputable lenders will issue a proposal or a term sheet that includes details about payments, fees, terms, security, etc.

Option III: a loan to finance commercial business franchise. This option tends to provide maximum flexibility for most affiliates. Franchise loans are generally secured only with the activities of the franchise, leaving all personal property released. Pay attention to what the franchise business has been used as security (see the story under Option II).

In terms of true, all-in cost for this type of financing, as we mentioned in Option II, this can be a complex subject. All the elements mentioned in connection with Option II apply in this case with Option III. Get proposals in writing, the review of proposals with a trusted advisor, and make a decision with full knowledge.

About InSource Capital Services, Inc. We specialize in franchise financing. As proud members of our local Better Business Bureau and the NAELB, promote and sign a Code of Ethics business. We are committed to "raise the bar" when it comes to fair and honest business relationships with our customers and business partners.

Features of our franchise financing programs include:


Fixed rate loans to 84 months
No collateral is outside, beyond the activities of the franchise and good credit
Pre-funding, we are able to pay your suppliers directly
Credit Approvals in just 5 working days.
Our commitment to all members of the community franchise are:
Quick delivery times
Clear answers to your questions
Competitive prices
Honesty and integrity
Find a way to get the job done!
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