Are you interested in buying a franchise but not sure if you have enough money to invest? It’s a fair question since the biggest hurdle to franchise ownership is typically finances.
Don’t be discouraged though!
Fortunately, buying a franchise is more possible than you might think. While becoming a franchise owner will always require a large investment, it is feasible to own a franchise with little or no liquid capital to invest upfront. If you consider the various costs you need to account for and understand your options for financing, then business ownership might be within your reach.
What Are the Costs of a Franchise?
Franchise owners have the opportunity to partner with a successful brand and a network of already existing franchises. While there are many benefits that come with this partnership, it’s important to understand the fees as well.
Costs to Consider
- Initial Fee – This will depend on the brand, but it ranges from $10,000-$100,000.
- Royalty Fee – Again, each brand will be different, but it’s typically a percentage of the franchise’s revenue ranging from 5-50%.
- Marketing Fee – Franchises often require their franchisees to spend a certain amount of their revenue on marketing efforts. This is usually in the 1-4% range.
- Additional Costs – These include business insurance, inventory, equipment, hiring, business licenses, and more.
Is it Possible to Lower the Costs of Franchise Ownership?
There’s really no way around it, franchises are an expensive endeavor. However, there are a couple of franchise models that you should consider if you’re looking for options that require a lower investment upfront.
- Lifestyle business – This is a business that fits the lifestyle of its owner. It’s generally based on the owner’s personal interests and can usually be managed remotely. The characteristics of a lifestyle business lend itself to a low upfront investment – oftentimes you just need your computer to get started!
- Home-based business – Just like the name implies, this is a business that is run from home. This allows you to avoid the high costs that come with setting up a physical location and the overhead costs associated with it.
7 Ways to Start a Franchise With No Money
At the end of the day, franchises aren’t free. The money required to buy and successfully run a franchise has to come from somewhere. If you don’t have much money to invest upfront, here are some options to consider:
- Franchisor Financing – Some franchises will offer funding options for new franchisees to get started. They might want to see you make an investment as well to prove your commitment, but it’s a good option for those who don’t have sufficient capital to buy a franchise. If you have a particular brand you’re interested in joining, do some research to see if this option is available.
- Small Business Administration (SBA) Loans – The U.S. Small Business Administration does not directly extend loans, but they do provide the backing that an aspiring business owner needs to acquire a loan from a private lender. The two SBA loan options are a General Small Business 7(a) Loan and a 504/CDC Loan Program.
- Home Equity Loan or Home Equity Line of Credit (HELOC) – This option for obtaining a loan requires using your home’s equity, which is the difference between what your property is worth and what you owe. You won’t be able to borrow the full amount of equity, but it could still be enough to cover the minimum investment required for a franchise. Keep in mind that this course of action puts your property at risk if you default on your loan.
- Traditional Bank Loan – It’s often easier for a potential franchisee to obtain a bank loan than someone starting a business from scratch. This is because the franchise is already established and proven to work. You’ll likely need a solid credit history to pursue this option.
- Rollovers for Business Startups (ROBS) – This option allows you to take money out of your retirement account to invest while avoiding the fees that normally come from retirement withdrawals. You will need a 401(k), 403(b), or an IRA account to qualify for a ROBS plan. This is a great option for those who want to avoid working with a lender entirely.
- Business Partnerships – Another option is to find a business partner who is able to finance the investment. Keep in mind that this option requires giving up partial ownership of the business, so make sure you choose a partner that you can trust. Additionally, establishing a formal partnership agreement would benefit everyone involved.
- Friends & Family – Some people have a friend or family member who is willing to give the amount of money needed to invest in a franchise. The terms involved are usually more flexible, but there’s also more potential for conflict. If this is an option for you, it’s important to make a formal arrangement to protect everyone’s interests.
5 Tips to Successfully Purchasing a Franchise With Limited Funds
If you have limited funds but still want to pursue buying a franchise, here are some ways you can set yourself up for success:
- Choose the right franchise – Do your research on the franchise brand you’re interested in pursuing to ensure it’s a good fit for you. Not only does this mean having goals and values that align with the franchise, but it includes being able to afford the upfront investment and recurring fees.
- Created a detailed business plan – A solid business plan is essential for aspiring business owners. Not only will it help you measure progress and make adjustments down the road, but it is also required to secure financing. This is one of the first things you can do when pursuing business ownership.
- Only buy what you can afford – Generally, you shouldn’t seek to invest more than you can afford. Even if you can make it work in the short-term, it will likely make your life harder in the long-term. Consider working with a financial advisor so that you can understand your financial situation and make a wise investment.
- Clean-up your personal credit – Having good credit is often a key factor to obtaining the funding you need. If possible, take steps to fix any errors that are hurting your credit report. Not only does a franchisor want to see that you’ve been responsible to pay your bills, but a solid credit history increases your chances at securing a financing opportunity.
- Consult with a franchise broker – A franchise broker is like a real estate agent in the franchise world. They help match entrepreneurs with the right brand in order to set them up for success. Just like a real estate agent, the potential franchisee doesn’t pay a dime upfront. With decades of experience, FranNet is a franchise broker represented in all 50 states and 5 Canadian provinces.
Interested in Owning a Franchise? Contact a FranNet Consultant
If you want to buy a franchise, but aren’t certain you have sufficient capital to invest, don’t hesitate to reach out to a FranNet franchise consultant. Our franchise experts will provide you with everything you need to make an informed decision, which includes helping you understand your funding options. Schedule your free consultation today to get started!