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Funding Options
What are my funding my options?
Personal Savings and Investments:
Self-funding from savings and/or investments in marketable securities outside of retirement accounts. This flexible option can either fund the entire franchise investment or serve as the equity injection required for a loan.
Retirement Accounts (ROBS)
Employ Retirement Accounts through the Rollover as Business Startups (ROBS) strategy. By rolling over funds from an IRA or 401K, you can purchase stock in your corporation. This tax-deferred and penalty-free approach allows you to invest your retirement funds into your business, satisfying equity injection requirements for SBA or conventional loans. Of note, when considering forming a business entity, remember this form of funding is only eligible for c-corporations.
SBA Loan Programs
Explore Small Business Administration (SBA) loan programs, with the 7(a) program being a common choice for starting and growing small businesses. SBA loans typically require a 10% – 20% equity injection and offer favorable terms for leasehold improvements, equipment, and working capital. The maximum SBA guaranteed loan amount is $5 million.
Conventional Loans
Consider conventional loans from banks or non-bank lenders, especially suitable for existing franchises with established positive cash flow. While less common for startups, these loans may be used for buying or refinancing an existing franchise financed by an SBA loan. Conventional loans often demand a 30% equity injection with terms up to 7 years.
Home Equity Loan or HELOC
Leverage home equity through loans or Home Equity Lines of Credit (HELOC). These options allow homeowners to borrow against their residence's equity, providing funds based on the property's market value. Home equity loans provide a lump sum, while HELOCs offer a revolving line of credit, with lenders typically offering up to 80% to 90% of the home's value.
Securities Backed Line of Credit
Consider a Securities Backed Line of Credit, collateralized by a portfolio of liquid assets such as stocks, bonds, ETFs, and mutual funds. Lenders may extend credit up to a predetermined percentage of the portfolio value, enabling borrowing without the need to sell securities. This type of funding is particularly effective for financing working capital needs.
Can I get funding for my business?
Credit Assessment
To make a favorable impression on financiers, experts agree it is advisable to uphold a robust credit rating of 680 or above. This involves exhibiting a consistent history of managing financial obligations, devoid of recent issues like outstanding bills, insolvencies, property repossessions, or akin financial setbacks.
Equity Investment
When commencing a business endeavor, there is often a requirement to infuse some personal funds, commonly referred to as a down payment or monetary injection. This typically constitutes a proportion of the overall expenditure needed to initiate the business. Alternatively, funds from avenues such as FranPlan, involving the transfer of funds from a 401(k) or IRA, can be employed to fulfill this prerequisite.
Loan Security
Lenders may insist on the provision of assets as collateral for the loan. These assets can pertain to either your business or personal belongings. This requirement is intended to instill confidence in the financier, establishing a contingency plan if loan repayment becomes challenging. Additionally, if you possess a minimum of 20% ownership in the business, you may be required to personally underwrite the loan.
Expenditure Rate & Post-Loan Closure Financial Flexibility
Financiers seek assurance regarding your capability to manage both the fiscal aspects of your personal life and the commitments of the newly acquired business loan. A preference is typically given to a dependable income source or readily available funds that can cover living expenses and business loan repayments for an estimated year. This ensures financial resilience during the initial phases of your business.
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