Fund a Franchise with SBA Loans | By: John Mollica, CPA, CISA
So you want to start a franchise!
What costs can you expect to open the doors?
More than you think.
Fees To Fund A Franchise
First, you have the franchise fee. Almost all franchises have some sort of “buy-in” in the form of a franchise fee. They can be as low as several thousand, but can reach $100,000 and beyond.
Next, franchise financing – there are many organizational and start-up type of expenses to get to the point where you open the doors. Is there a physical location? Say hello to leasehold improvements, monthly rent, maintenance, personnel, and other related expenses.
Plus, there are legal fees… there are ALWAYS legal fees! Maybe we should have been “My Franchise Attorneys”!
What about after you open the doors?
You better bet you’ll need funds to operate your business before the sales start flowing in. This is called working capital. These are funds that allow you to operate the day-to-day business. If you have no working capital, you could get stuck in a position where you can’t pay vendors, can’t process payroll, can’t take draws for your personal expenses, and worse. Think of working capital like the blood of your business.
No blood, no business.
So whether you’ve been living on mom’s couch, working a typical 9-5 job, or in retirement and want back into the world of the living, there is a route available for you to obtain ALL the funds you need to open your shiny new franchise! This route is called the SBA loan.
The SBA, or Small Business Administration, is a federal organization that exists to assist small businesses start, grow and thrive. One of their very attractive offerings is called the SBA loan. This loan is an SBA-approved loan that allows you preferential rates and terms. For example, the term of the loan is just 10 years, vs. the typical 15- and 30-year loans you see in the form of mortgages. Plus, there is no prepayment penalty on these loans. So if you absolutely outperform in years 1 and 2 in your business, you could pay back your whole loan and be debt-free!
Now the best part of all about these loans, besides competitive interest rates, is the SBA actually guarantees 85% of the loan. That means if you go bankrupt, you’re only responsible for 15% of the loan balance outstanding. So if you take out a $100,000 loan, you’re only on the hook for $15,000. It’s actually a very attractive form of business funding.
You can get one of these loans in as little as a couple of weeks. The speed of processing depends on your qualification and ability to provide all necessary documents to prove your financial position. My Franchise CPAs can help you get your documentation together to speed up this process.