Franchise financing is how franchisees pay for startup business expenses and franchise fees. Most of the time owners will need to apply for a loan because they cannot afford these out-of-pocket costs. There are many ways to fund a franchise, below are a few options from the riskiest to the most recommended:

1. Pay in Cash: Some people might have the means to fully pay in cash, but this option can be risky. A business needs time before it will start generating income, and you don’t want all your cash tied up when you could be investing it elsewhere. Why risk your total net worth when there are other safer options that will give you more in the end!

2. Home Equity Loan: This type of loan enables you to use the equity you’ve built on your home as collateral for your business. They are easier to qualify for than other loans, interest rates are usually fixed with longer repayment terms, and you can access the funds immediately in a lump sum. However, keep in mind you risk foreclosure if you default on the loan. If this option doesn’t seem right for your situation, there are other options like a cash-out refinance.

3. Hard Money Loans: A short-term loan that doesn’t deal with traditional lenders but instead private companies that accept personal assets as collateral. “Hard money” refers to the tangible asset being used that backs the value of the loan. Unlike traditional loans, a hard money loan is approved based on the value of the property being purchased. The process is less rigorous and will happen quickly, but since the lender takes on more risk you incur higher interest rates and possibly larger down payments. Just like a home equity loan, if it is defaulted the lender can take ownership of the asset to recoup its losses.

5. Rollovers as Business Startup (ROBs): This method is increasingly common and allows you to withdraw money from a retirement savings account such as a 401(k) to fund your new franchise. Since the money is being directly rolled from your retirement account, you are not liable to pay taxes on the distributions. ROBs are not loans so you don’t have to worry about repayments or default. Although this is legal, you need to make sure you find a trustworthy person/company to work with who will ensure all regulations and laws are being followed.
6. SBA Loan: This is one of the most popular ways to finance a franchise. A Small Business Administration Loan is issued by a private lender but backed by the government. After applying for an SBA loan through a bank or credit union, that lender applies to the SBA for a loan guarantee so if you default, the government pays the lender that guaranteed amount. This is one of the lowest interest rate options on a non-collateralized loan on the market today, and one of the safest because if you default your personal assets are not on the line.

Becoming a franchisee is a popular way to own a business and we want to help you achieve that goal without risking your net worth. As you can see, there are many available options for getting the money you need. Make sure you do research into each one and figure out which one is the best for your situation!