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With every new franchise launch there are important
decisions to be made: the right industry; the right
concept; the right product or service-and all are vital to
the potential success of the venture. What many people may
not realize is that the financing choices you make can be
just as crucial. Without acknowledging your specific needs,
your funding strategy could fail. In this article, I'll
explore some of the most common types of franchise
financing and detail the pros and cons of each option.
SBA Loans
The SBA doesn't actually provide the loans; they provide
the guarantee, which helps banks feel comfortable providing
the capital.
Pros:
Lengthy payment terms; fixed-rate options; no prepayment
penalties on loans under 15 years.
Cons:
Sizeable down payment required; collateral necessary;
variable interest rates; bank could take home if used as
collateral and franchise fails
Home Equity Loans and Home Equity Lines of
Credit
The homeowner is given a sum of money in return for the
collateral of the home with a Home Equity Loan; with a Home
Equity Line of Credit, the transaction works more like a
credit card where you draw from the line and pay interest
only on what you owe.
Pros:
Relatively inexpensive; flexibility of fund usage
Cons:
Risky variable interest rates; loan amount determined by
bank; bank can take home if you default; monthly payments
factor into overall business expenses.
Unsecured Loans
Similar to equity financing, these loans are installment
loans with the borrower paying interest on the entire
amount as soon as the loan is granted.
Pros:
Fast approval process; no collateral required; favorable
interest rates during introductory period
Cons:
Origination fees may be high; interest rates will climb
during the life of the loan; credit score could be impacted
from brokers searching for lenders to work with you
Peer-to-Peer Loans
This newer method is served by platforms composed of
individual investors who make loans available to borrowers
online.
Pros:
One payment per month (even if using multiple lenders);
funding is fast
Cons:
Shows up as revolving credit and can impact your overall
score; funding is not guaranteed; monthly payments are very
high due to three-year amortization
Rollovers for Business Startups
This vehicle allows you to utilize your retirement funds
(401k, 403b, etc.) without tax penalties to invest in a new
franchise.
Pros:
Allows start of business debt-free; can be combined with
other funding sources; you can receive profit sharing and
contribution matching
Cons:
Could be risking your nest egg; investment relies
completely on you and your abilities to run the
franchise
Of course every financing method contains risks and
variables that may seem frightening to a first-time
franchisee, but doing the research on what's best for your
individual needs can ensure a great set-up for funding
success.
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