A franchise is a very predictable and safe way to enjoy the benefits of being an entrepreneur. Financing a franchise purchase is oftentimes a topic that people do not address early enough in the process. Although there are many great business and franchise opportunities available, how you finance your franchise venture often determines the level of success you will enjoy. Is your personal credit good? Do you have management or strong work experience? Can you invest 25% as a down payment toward the total cost of the business? Then, you should be able to receive funding toward a franchise investment. Traditionally, there have been four ways that people finance a business:
1. Loans through the SBA
 The SBA doesn’t lend money! This is a common misconception that many people have. They simply work with banks to get your loan. Your chances of obtaining a loan oftentimes improve when working with the SBA; however, it will likely be more expensive (and time consuming) to obtain this method of financing for your franchise.
 
2. A Bank Loan
Tell a bank that you want a loan to start a new business…you won't get any money unless you can prove you don’t need the loan because you can completely collateralize the business with assets such as cash, stocks and home equity. 
 
3. Home Equity
 With the current situation in the housing market, this may not be the best option for you. If you have considerable equity, this may be an alternative. If not, you will need to look elsewhere.
 
4. Using 401k or IRA funds
Remember when you decided to put your savings dollars into an IRA or 401(k) plan as a good way to invest for your future? Perhaps your employer added to your contributions to help make those investment dollars grow even faster. Well, we all know what has happened to the market and our retirement funds over the past few years – none of us has come through that period unscathed. 
The thought of pulling out some or all of that money was not much of a consideration based on the penalties you heard you would pay for early withdrawals. Two things have changed and both of them have opened up new financing opportunities for people wishing to start their own franchise or business.
The first one is simply the thought by many people today that leaving their funds in their IRA or 401(k) and hoping for a turnaround in the market and getting back to old growth rates just isn’t likely to happen for a good while. I keep hearing things like “maybe I’m better off betting on me to grow my investment dollars instead of the people who manage my funds now”. But if you take your 401k funds out early, won’t those penalties really hurt?
 Well according to some top industry experts, now there is a safe, legal way to use retirement funds to invest in your new business without paying any penalties or taxes. This can be accomplished by rolling over some of your retirement funds into a qualified retirement plan in your own company. This allows a prospective new business owner to release the money in his or her retirement plan and use it for a fresh start in business. 
You can do this without penalty and without taxes, using a section of the Employee Retirement Income Security Act that’s not commonly known. Small business planning and retirement funding provides a new business owner with a proven method to use his or her IRA or 401(k) rollover assets to invest in a new business. Hundreds of thousands of Americans have funds accumulated in retirement plans. What the vast majority of these Americans don’t know is that they can access the funds they have worked so hard to accumulate for the purpose of owning and running a new business. Retirement funds can help individuals begin new phases in their lives, long before retirement.
 
         Here are the basic steps in small business planning and retirement funding
 
  1. A new C-corporation is established in the state where the new business owner will be doing business.
  2. The C-corporation creates a new Individual Account Defined Contribution Retirement Plan. When the corporation is established, the plan must be a profit-sharing plan in order for the transaction to comply with federal law.
  3. The new business owner then rolls over their existing retirement funds into the corporation’s new retirement fund. 
  4. The new retirement plan purchases stock in the newly created C-corporation.
 
    • According to one expert, “experience has taught us that the biggest hurdle to overcome in beginning the retirement conversion process is client fear. Clients are afraid to spend their retirement funds. They are afraid to embark on new business ventures. They are afraid of change.”
 
    • “To overcome such fears, it is important to address them head-on. I tell clients that they can use their retirement funds, without penalty, in a perfectly legal fashion, to make the next steps in their lives. They can realize the dreams that they deserve and we show them how to benefit from their own good planning and diligent savings.” 
 
    • Yes, there is a cost to get your corporation set up to take advantage of this system, but you will have those kinds of business costs setting up any type of corporation. Using this system may not be right for everyone that wants to go into business, but it is another source of financing your new business venture that you might want to investigate among the many options. 
 
    • You have heard it said that entrepreneurs are risk takers. Buying a franchise or new business is certainly more of a risk than continuing to do what you are doing now…..or is it? Perhaps the same can be said of using your retirement funds to help with the purchase of a new venture. It probably wasn’t what you thought you might be doing with your retirement dollars… but it may sure be worth some thought now.
 
NOTE : If you are a military veteran, be sure to ask about a program available to veterans called VetFran.  Franchise companies participating in this program give discounts to veterans as a thank you for serving their country.
Common Question
  • Q: I've found the franchise I want, but I don't have enough cash to completely fund the startup of the business, so I'm going to need to get a loan. I'm just starting to talk to banks, and they seem to want a number of things I don't have, such as a complete business plan with projections for the business. They also expect me to personally guarantee the loan even though the business is a corporation. Is my best option to use the SBA in order to avoid these hassles or what should I do?
 
  • A: This is the number-one topic for questions we receive. The best source of information about your financing options is the franchisor. They should be able to tell you, from experience, how likely it is for you to obtain financing from any particular source. It may also be helpful to understand the principles that underlie your ability to get financing, regardless of the lending source. There are four "Cs" involved in any decision to loan money to someone: Cash, Credit, Collateral and Character. The fact is that it doesn't matter whether you go to a bank, use the SBA guarantee service or go to a friend or relative for the loan.
The same basic rules apply to any successful attempt to get credit. Here's how the four Cs work:
  • Cash. One of the most common misconceptions people have is that they can borrow all the money they need to open a business. Unless your personal net worth is far larger than what you need to borrow, this is almost certainly not true. For SBA loans, you'll most likely have to come up with funds—either from your own assets or other sources—probably equal to at least 25 to 30 percent of the total investment needed to start the business, before the SBA will consider lending to you. Lenders like to make sure you personally have "skin in the game."
 
  • Credit. Another thing lenders insist on is a strong credit history. This means they want to see a track record of you borrowing money and making your payments on time. Though your home mortgage might be the best example of a large loan you have serviced well, you'll find you get almost no credit for that type of loan. Everyone realizes most people will take care of their mortgage before their other bills, so what they really want to see is a pattern involving timely payments on other types of loans. While a good credit history doesn't mean you'll get a loan, a bad one almost guarantees that you won't. In todays economy, it is best to have a score over 700.
 
  • Collateral. Most lenders require you to completely secure any loan you want with personal assets sufficient to provide for 100 percent recovery if you default on the loan. In many cases, franchisors can recommend lenders with whom they have had a good experience. This may include someone other than a direct lender -- since these firms are often able to select the best source of financing from a pool of aggressive lenders. These firms are very familiar with Small Business Administration guaranteed loans. It doesn't matter one bit whether your business is a corporation or any other type of entity, or whether you go through the SBA process—they are going to look to you for collateral.
 
  • Character. The final condition you must meet relates to your character or reputation. Frankly, this is like your credit history—having great character won't ensure you'll receive a loan, but having a bad reputation will almost guarantee that you won't. Having strong enough character and a great reputation used to be enough to offset a lack in some of the other Cs, but those days went out the window with the S&L crisis 15 years ago, at least as far as any regulated lender is concerned.


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