How To Acquire Capital For A Franchise Purchase: 7 Smart Tips

When choosing your favorite franchise, you need to make sure you have enough capital not just to purchase it, but to give it the best chance at succeeding. Prices vary widely between franchisors (and some franchisors may even be willing to negotiate), but many of the costs will typically come from new liabilities that stem from running the business. When tapping into your finances for the big buy, these tips can help you locate the necessary capital and win new loans so you can start the business on strong footing.

1. Use Cash to Generate Capital:

No matter what type of debt you rely on, you still need to put down some of your own cash. Ideally, you would be able to pay for all primary franchise costs with cash you already have in the bank, but you will probably need to depend on at least some debts. However, expect to support around 20 percent of so of the franchise startup costs with your own money. This includes those smaller fees that are easier to pay with cash and the money you may have to put down in order to qualify for a business loan.

Also, a reliable supply of cash to pay your expenses before the business is profitable will make lenders more willing to work with you. The more cash you have, the more easily you can make it work to generate additional capital.

2. Focus on Easy Credit First:

Reach for the quick, reliable types of credit already at your fingertips. A home equity line of credit, for example, is an excellent source of franchise funds, particularly if you are already using one. If your credit is especially good, then seek out a full mortgage, since this type of personal collateral is generally more reliable than aiming for a more difficult business loan.

3. Ask Your Franchisor for More Info:

Talk to your franchisor openly about your financing and ask them about any aid they could offer. Many franchisors, especially the larger brands, offering some type of financing of their own, programs that you can enter to pay for some of the key costs. These programs are often easier to qualify for than alternative loan options, but that does not mean their terms are better. Compare franchisor options to your other sources of capital before making a decision.

4. Impress Commercial Banks with a Good Franchise Choice:

Commercial banks remain one of the most common sources of franchise capital. However, banks will closely examine your franchise choice, including its current state and full financial history. Banks love to see a strong, stable franchise with plenty of future prospects. Before you apply, do your own due diligence on the franchise. Study its financial statements, history and current industry situation. By picking the most solvent franchise you can find, you will increase your chances of getting a commercial loan.

5. Get Your Loan Package Ready:

Even though you are buying a franchise, you still need to do plenty of preparation yourself. Get all your own financial documents ready, including your tax returns and bank account documents. Develop your own business plan that shows exactly what you want to do with the start-up and its projected costs.

6. Study SBA Loans:

Small Business Administration loans help entrepreneurs start their own companies, but you can also qualify for them if you are purchasing a franchise. These loans may be a better alternative to tougher commercial loans.

7. Seek Alternative Loans for Your Specific Situation:

Investigate local and national programs designed to help out new business owners. If you are a veteran, look into subsidized business loans directed to veterans. If you belong to a minority, search for related loans and grants to get started. Investigate any current state programs that offer high-quality loans to encourage business in your area. Some programs even help convert retirement funds, like a 401K into cash for investment purposes.

While any choice you make to raise capital has to be carefully considered with respect to your own financial circumstances, there are many options out there to help a would be entrepreneur get his or her business off the ground.

Andrew Ewing is a professional blogger that shares tips and advice about franchising topics. He writes for FranchiseExpo.com, a leading franchise directory.