How to Comfortably Finance Your Franchise Dream

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How to finance your franchise dream in the U.S. for Atlanta residents

Franchise ownership is an ideal way to make the leap to being a business owner. You can see that as a way of financing your franchise dream.

The great thing about becoming part of a franchise system is that your leap comes with a safety net – the support and guidance of an established business. We previously discussed extensively on the most powerful advantages of acquiring an established business.

If you are considering this route, you have to consider how to finance your dream. There are many financing avenues to explore, and it’s important to fully understand all your options before you make any decisions.

One exciting thing about exploring franchise ownership is it’s often easier to obtain financing as a franchisee than as a new, independent business owner.


The vast majority of franchisees bankroll their franchise through some form of self-financing. This can mean a home equity loan, a second mortgage, using money from savings or even withdrawing funds from your retirement account. This last option is known as Rollover for Business Startups (ROBS).

ROBS allows you to use money in your retirement accounts (either a 401(k), traditional IRA or other eligible retirement account) and invest that money in your franchise. The advantage of this option is you do not have to pay taxes or an early withdrawal penalty for removing these funds.

Guidant Financial reported that in 2016, about 60 percent of their small business clients bought a new or existing franchise. The most popular financing options Guidant has seen, aside from the business owner’s personal cash/savings, are ROBS, SBA loans and unsecured loans.

Typically, if you remove money from your tax advantaged retirement account, such as a 401(k) or IRA, before reaching age 59 ½, you are required to pay income taxes on the money as well as a 10 percent early withdrawal penalty.

If you are taking money from your 401(k) you will have to have the permission of your current employer. In addition, this kind of borrowing has restrictions on the amount you can take out, and the funds will need to be repaid with interest.

But ROBS is different, because it is viewed as an investment in your new business rather than a withdrawal from your retirement account. Just as with any funding option, there are pros and cons to financing your franchise with ROBS. Additionally it is not a process that is simple, you will need to help of an experienced attorney and CPA and will  need to work with a company that specializes in ROBS transactions.

Setting up ROBS to fund your franchise purchase takes five steps.

5 Steps to Setting Up ROBS to Fund Your Francise Purchase

  1. Form a C Corporation. Due to the IRS’s prohibition on certain transactions involving qualifying employer securities, LLC, Sole Proprietorship, LLP, or S Corporations will not work with ROBS, only a C Corporation will.
  2. Create a retirement plan for your C Corporation. You have several options, including a 401(k) plan, a profit sharing plan, defined benefits plan, a defined contribution plan or a combination of plans, such as a 401(k) with a profit sharing component.
  3. Transfer funds from your personal retirement account to the new company retirement plan. This is the part of the process that entails the rollover. After your C Corporation is established, and your company retirement plan, you must transfer your personal retirement funds to your C Corporation’s new retirement plan.
  4. Purchase stock in your C Corporation. At this stage you will use the funds in your new retirement plan to purchase stock in your new C corporation. The amount of stock that you purchase may not equal 100 percent of your business’s shares. Even when using ROBS to finance, franchisees often utilize other financing options as well.
  5. Funds become available to the corporation. Now you can start to access your C Corporation’s funds to launch and grow your franchise business.

If these steps seem a bit complicated, they are. That is why it is recommended that potential franchisees work with an established ROBS provider to navigate the terrain and ensure that you are working through the process correctly.

The next step is to determine if you qualify for ROBS. Do you have a qualifying retirement account? The accounts that are eligible for ROBS include:

  • 401(k)
  • 403(b)
  • SEP
  • TSP
  • Keogh
  • Traditional IRA

Roth IRAs and Roth 401(k)s are not eligible to use as a rollover for business startups with which you can finance your dream startup.

The second qualification you will need to meet is the amount you have in your eligible retirement account.

Anything less than $50,000 will be cost prohibitive due to the fees ROBS costs. Your ROBS provider will charge an upfront fee of approximately $5,000 that will come out of your own pocket while the process is starting up.

This amount cannot be taken from your retirement accounts, and it will be used to set up your C Corporation, as well as filing paperwork with the IRS. Additionally, there will be an ongoing monitoring fee you may be charged per month, as well as an additional per employee fee if you have more than 10 employees.

If you have less than $50,000 in your retirement account, you could end up spending more than 10 percent of that funding on the setup costs alone. Since a startup loan typically has an origination fee of around 4 percent, this is considered too high of an expense.

Third, if you are currently working for someone else, you won’t be able to utilize ROBS with your retirement account from that employer. If you have an account from a previous job, it can be used. Finally, ROBS requires you to be an involved franchise owner working 35-plus hours a week for your business. Please, look up this article to be more guided – Startup vs Franchise: Pros and Cons.

Funding your franchise via ROBS is often a good indicator of success. A study conducted by Guidant Financial found that 81 percent of business owners that funded their startup this way were still in business four years later. Meanwhile only 39 percent of those surveyed who funded their business with a traditional business loan were still operating.

SBA Loans

How to finance your franchise dream using SBA loan

Small business administration or SBA loans are government-guaranteed loans. They are a great choice for financing your franchise dream because they offer long repayment terms and low interest rates.

Of course, if you’ve worked closely with a successful businessperson one thing you can’t afford not to learn is how to lower your interest rate and radically increase your profit.

However, qualifying for one of these loans requires a solid financial history, including a good credit score (something higher than 650), as well as collateral and a 10 to 20 percent down payment. Check out this article on how to increase your credit score.

The reason that a large portion of SBA loans go to franchisees is because the lenders are able to predict the franchise’s ability to make their loan payments based on easy access to performance data for other franchises in the system.

Best of all, a SBA loan, while good for startup costs associated with the opening of a franchise location, can also be used for working capital, for expansion of your franchise dream or even renovation of an existing franchise.

An important key to understanding SBA loans is the Franchise Registry, a collaboration between the U.S. Small Business Administration and FRANData, a private organization.

The Franchise Registry is a listing of approximately 2,000 franchise organizations that the SBA currently offers an expedited loan process. The Registry allows lenders to view a franchise systems historical loan performance data. As a result, more than half of lenders (55 percent) will only lend money to potential franchisees buying into franchises on the registry.

Your franchise being included on the Franchise Registry does not, however, guarantee you a SBA loan. It simply means that the franchise system you are interested in has met certain SBA rules. As a result, any loan applications for this franchise will be processed more quickly. As the typical SBA loan process can take three to four months, any expediting that can happen is welcome news for most entrepreneurs who are anxious to start their franchise business.

Financing Franchise Dream Through The Franchisor

Probably the best place to seek out funds to finance your dream of owning your own franchise business is via the franchisor itself. Why? To start with the franchisor is just as interested in expanding their business and ensuring your success as you are invested in the idea of being your own boss and achieving financial stability.

One reason to try and finance your franchise business through the franchisor is many have relationships with lenders already. Because of this relationship, the preferred lenders may be more likely to offer you financing, in addition to the fact that they have a better understanding of the franchisor.

The same holds true for companies that lease equipment. If the franchisor has a relationship, it can be in your best interest to utilize this company’s services.

Also, financing through the franchisor offers potential franchisees the opportunity to negotiate the startup and operating costs involved with getting a franchise business up and running.

Depending on the franchise you are purchasing, there can be a long list of items you will need to purchase to get your business going. This is why you should carefully study these tips before choosing a franchise opportunity no matter how enticing they look.

Of course, the franchisor will have noted the cost of all these items in the Franchise Disclosure Document, but by financing through the franchisor you may be able to negotiate a reduction in the franchise fee to offset some of the upfront expense.

Other Financing Options

Earlier, we discussed in depth Rollover for Business Startups as one method of self-financing your franchise, and later handled SBA loans. If these two choices don’t work to finance your dream of becoming a franchise owner, there are other options such as a home equity loan, a second mortgage or using money from you or a family member’s savings.

  • Home Equity Loan or Line of Credit/Second Mortgage—An option for homeowners who have equity in their homes. You can borrow against this equity to help finance your franchise dream. The rates for a home equity loan generally range between 2 and 7 percent. The catch is if you have issues repaying the loan, your home is on the line.
  • Family and Friends—If you have family members or friends who are willing to invest in your franchise, this could be a fast (and low interest) way to raise the necessary capital to fund your entrepreneurial dream. Of course the downside of this is that you are risking a loved one’s money, and there are some potential pitfalls with this arrangement. Treat this arrangement as seriously as you would a loan from a bank by drawing up some sort of documentation so it is clear for all parties what the terms of repayment will be.

If you decide to use some of your savings to finance your new franchise venture, it is important to not utilize all of the available cash you have.

A good rule of thumb is to leave at least 25 percent of your savings in the bank. For example, if you have $10,000 saved, only withdraw $7,500 to use towards your franchise startup costs. This still leaves you some savings in case of emergency while your business is getting off the ground. And if for any reason you eventually run into debt, you can read up these tips on how to launch a business when you are in debt.

Choosing The Right Financing Option

Now that you have an idea of what options are available to finance your dream of owning your own business, how do you decide which choice is best for you and your situation?

Ames shares the three things he believes all potential business owners should consider when looking at financing. First they should ask ‘What kind of business do I want to buy and how much funding will I need?’

Ames says, “Different franchises have varying initial investment amounts. It’s important to factor in not only the initial investment/buildout costs, etc., but also to look at working capital to help carry the business until it generates a profit.”

Next a prospective franchisee should address the question of what is their current and forecasted cash flow? “This will help you determine how much of a monthly payment you can afford should you choose a debt-financing option, like an SBA loan,” Ames explains.

Finally ask where your down payment will come from, and how much of a down payment can you afford? “SBA loans require a 20 to 30 percent down payment to show a good faith effort toward paying back your debt,” Ames says. “The amount of your down payment (among other things) will determine how much of a loan you’ll be approved for.”

Ames says that which option is right depends on the individual franchisee, their cash flow and their adversity to risk. “There are certainly financing options that have higher/lower costs associated with them.

The general rule of thumb is to look for the financing option with the lowest costs: interest rates, lender fees, etc. The higher the cost, the higher the monthly payment will be, and the faster you should try to pay it off,” he adds.

As an example, he explains that SBA loans are among the lowest cost debt-financing methods and work well for qualified borrowers who can roll monthly payments into their ongoing expenses. “On the other hand, debt-free funding options such as 401(k) business financing (ROBS) are great for those who don’t have a tolerance for debt or the lengthy process of getting a business loan,” Ames says.

5 Questions to Ask When Determining the Right Financing Option for Your Franchise Dream

How to finance your franchise dream and 5 questions you must ask when choosing a financing option

  1. What is the total cost of financing (including interest rates, fees to secure financing, etc.)?
  2. What, if any, of my assets are at risk as collateral?
  3. What are the terms and conditions if I default?
  4. How will the total and monthly repayment cost work into my current and expected cash flow?
  5. What is the amortization schedule of the debt? Over what period of time will I have to pay it back? Will my monthly payments or interest rates change over time?

Author’s Bio

Eric Bell is the General Manager of Franchise Gator. Eric has more than 15 years of franchise industry experience. He began his career in 2002 as a Hollywood Tans franchisee in Atlanta where he also served as area manager and helped develop the Atlanta territory. In October 2005, Eric joined Franchise Gator as a sales representative and went on to hold several positions including sales manager and director of sales and service. Eric is also a member of the Southeast Franchise Forum and is a Certified Franchise Executive.

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