Ambitious and entrepreneurial people tend to explore different opportunities and business structures before starting a business of their own. Starting a business can be a tedious task and approximately, 20% of new start-ups tend to fail in their first year of business, and 50% by 5th year.
Franchises have always proven to be successful in the past, however, buying a franchise of your own requires a whole lot of money. In this article, you will understand how to own a franchise of your own without money or with limited funds in your pocket.
Cost of Opening Up a Franchise
Cost of franchise usually depends on the brand and the business structure. The initial fee franchise owners need to pay can range anywhere between $10,000 to $100,000. Next, comes the royalties. The royalty fee structure depends on brand to brand and are usually based on the revenue of the business. The royalty percentage can range from 5% to 50%
Most franchisees need to spend a lot of money on their marketing fees per annum. The marketing activities make sure that the franchise location is promoted at its best and gives the business an opportunity to be known and grown. Marketing pay can lie between 1% to 4% of the revenues.
There are several other costs associated with a franchise such as insurance, inventory, wages, hiring, business licenses and equipment. Owning a franchise might be cheaper compared to other business types, but it’s definitely pretty expensive in general.
Franchise Buying Options Without Money
Here are a few funding options you can follow in order to raise the capital you need to set up your own franchise business. Let’s look at some.
1# Franchisor Financing
Some brands tend to offer franchisor financing, but you need to do your research to know about such brands. These brands understand that the potential franchise owners might not have enough capital to begin their business, therefore, they provide funding options to their business partners to get started.
It may have some requirements such as having a good credit score, your commitment to the venture and if you are an investment to the business.
If you find yourself in a situation where you have no funds or limited funds to set up a franchise business, one way to turn this situation around is to consider getting a partner who can finance the whole project. Such an investor and partner can be a family friend, family member, and old colleague or anyone whom you can trust on.
Partnership structure might lead to losing up on your complete control over the business, but a solid partnership agreement that outlines everyone’s responsibilities, distribution of funds, allocation of profits and equal dissolution process is the best way to raise capital for your franchise business.
3# Bank Loans
Banks and credit unions offer small business loans to individuals that meet their specific requirements such as, an eligibility criterion:
- A high personal credit score (from 670 to 850)
- A good credit utilization ratio (under 30%)
- A long history of credit with banks
If you are able to pass all the eligibility requirements, you can enjoy the traditional bank loan in order to open up your own franchise.
Also, traditional lenders can also be a good idea to raise capital from since them giving out loans to franchisees has been a business model that has worked in the past. The traditional money lenders are ecstatic about providing loans to brands they recognize, and not so much to brands they have never heard about.
4# Roll-Overs for Business Startups (ROBS)
ROBS allows you to use your own retirement money to set up a franchise, while skipping the process of going to a lender directly. Usually, taking out retirement money before maturity requires a high fee. But, with ROBS, you are able to avoid the fees and access the money in just a few weeks.
In order to be eligible to take our money out as per the ROBS plan, you need to have a 401(k), 403(b), or an IRA account. You need to get in touch with the ROBS provider who can help you access these funds by charging a small and one-time fee without taking you through any hassle.
5# Small Business Administration Loans (SBA Loans)
SBA loans are known to be the best option to raise capital to buy franchisee without a single penny in your pocket. The SBA is a government institution offering long-term loans at competitive rates. The true meaning of SBA is a little different. They do not actually provide you with the funds, but they take up your guarantee in order to secure a loan from a traditional bank or a credit union.
Anyone with a low credit score should definitely go for this option. While there are two different types of SBA loans, which are:
- SBA 7(a) which offers up to $5 million with repayment terms ranging from 7 to 25 years, interest rates depending on the amount and length of the loan.
- SBA CDA/504 which provides up to 40% of the funds needed to buy a franchise, with limitations such as not using the loan for franchise fees.
6# Home Equity Loans
If you are a home owner, you can raise capital through a home-based line of credit or a home equity loan. Both these options depend upon the value of the equity from your home. Home equity is basically the difference between the worth of your property and what you owe on the property. For instance, if your home is worth 500k, but you only need to pay 300k more, your equity is worth 200k.
Home equity loans allows you to have cash, backed up by the equity of your house. By getting this loan, you put your property at risk if you end up defaulting your loan. They also require a high credit score and good debt-to-income ratio for approval.
Now you know how to buy your own franchise business without a single penny in your pocket. With no money, you have several options to raise funds to set up a franchise model and reach out to your target brand to discuss any opportunity coming your way.
Don’t waste any more time, begin your process of buying a franchise with the most suitable option above for you!