CAN I BUY A FRANCHISE WITHOUT MONEY?
What are the possibilities that a person with little or no money can finance and buy a franchise business?
In most cases, it is the lack of initial capital, not only to buy the franchise but also to make it work, which is the disruption. Many franchises will seek to have a franchisee, “skin in the game,” which means that they are interested in the success or failure of the business and tend to go the extra mile when necessary. If it is very easy to leave without losing anything, a franchisee can do just that. Start-up costs and other fees can range from $ 10,000 to more than one million dollars, depending on the type of business you want to start.
Regardless of the level of the economic crisis that a country may face, new companies will continue to emerge anyway, and many of these new businesses will be franchises, as most new entrepreneurs are looking to take advantage of available franchise opportunities. Owning a business in the United States for some is considered the fulfillment of the American dream, and franchising is one of the fastest ways to achieve that dream.
However, any franchise may seem better than starting a business from scratch; you must take certain steps that will allow you to buy a franchise that will be worth your financial resources and your time, as not all franchises will succeed. However, a reassuring statistic for franchises is that the failure rate compared to new businesses is lower.
While buying a franchise is usually cheaper overall than starting a new business from scratch, and comes with lower risk, there are always unique ongoing costs that increase before you even open your doors to customers. Franchise fees, insurance premiums, inventory, equipment, commercial licenses, and royalty payments are just some of the costs associated with franchising. With the initial franchise fee alone costing tens of thousands of dollars, the average person cannot merely write a check or withdraw funds from their bank account.
The good news, however, is that there are financing options that help to ease the financial burden of owning a business. Even better, many of these options have low-interest rates and favorable payment terms, so buying a franchise is more affordable. You can also use funds that you already have access to.
So, is it possible to buy a franchise company without money?
The fact that you have no money available does not mean that you should give up on becoming an entrepreneur. However, one thing to note when looking to buy a franchise without prepayment is that you need to do thorough research on the franchise you are considering to find out if it’s the right fit for you and how it would benefit you financially. Owning your own business is not a bad idea, but what prevents people from doing this is the lack of funding, as franchise opportunities require money to start and operate the business. Not using your money to buy a franchise business does not mean that it does not have its own money; it could only mean that their money is committed elsewhere, and therefore they need money from other sources to finance the franchise.
Before you can, however, buy a franchise with or without capital, you must have done a thorough investigation of the industry you intend to enter. Once you know which area is likely to generate passion in you, you will need to find out about the franchise features and how they are likely to align with your own goals and objectives. Be sure to use the services of a franchise consultant, such as the free consulting services offered by Let’s Franchise and later after you’ve found the right fit, a lawyer to help you draft and review contract documents that will ensure the proper structure of the transaction.
There are some scenarios in which you could probably buy a franchise without having to use your own money, but one of the criteria for achieving this goal is to ensure that you have drawn up a complete business plan that will convince those whose money you want to invest in your business. Below are some of the ways to buy a franchise business without having any of your own money.
#1 Leverage Your Retirement Account
This is the first option people usually use when it comes to buying a franchise with zero cash. It seems risky but it certainly works pretty well. The first thing to do is learn about your retirement accounts, the requirements and guidelines that help you stay in line and in compliance. Check here to learn more!
We have two types of retirement accounts: the 401k and Individual Retirement Account (IRA). These two work differently. If you are thinking of using 401k, you can apply for a loan against your 401k which you can now use to buy a franchise. However, it all depends on your 401k plan. You also have to pay an interest on the loan received. This will be going back into your retirement account.
On the other hand, we have the individual retirement account which works entirely differently from the former. Using the IRA, you cannot collect a loan against it unlike the previous one mentioned. Also, there are certain rules that must be followed. Using IRA as leverage to buy a franchise, the IRA is in charge of the franchise and not you. You will also have to hire a custodian whose job is to take care of the office and paper works. The franchise purchased must also be used for investments strictly and nothing else.
#2 Find An Absentee Investor / Partner
An absentee investor would make a great partner for someone that wants to buy a franchise and is willing to be the owner/operator. Absentee investors look for opportunities where they don’t have to run or manage the day-to-day operations of a business and are open to taking on the risks and rewards that may come from it.
You will have to convince the investor that investing the necessary money for the franchise will bring financial benefits within a defined period and a business plan with a strong pitch would be the best way for you to go about that . This type of option is advantageous for both parties, because you will not only get someone to invest their funds in the purchase of a franchise, but you will also have a stake in the business without being in debt.
#3 SBA Loan Request
SBA stands for Small Business Administration and can provide you with finances between $500 to $5.5 million to fund your business. It is a government-backed loan program, where millions of dollars are released annually to various credit bureaus so that those who want to start a new business, buy a franchise or buy an existing business can do so. There is, however, a limitation to the amount that can be borrowed, and there are also certain conditions before it can be considered worthy enough to be acquired. First of all, you must have a credit rating above 680, a well-written business plan, and, in some cases, guarantees.
It is often simpler to qualify for a Small Business Administration loan than a conventional loan, especially if you have an insufficient advance or lack of collateral. These loans are always provided by a bank or other financial institution, but are guaranteed by the SBA and generally involve more extended payment periods and lower interest rates. SBA-approved franchises can offer accelerated application processing to prospective franchisees. Ask the franchisor if he has an ongoing contract with an SBA approved lender. Otherwise, you can contact the local SBA office to find one.
Also, the SBA Veteran’s Advantage program offers special incentives for small business loans to veterans of the US armed forces.
#4 Franchisor Assistance
This is one of the best places where you can get the money you need to buy your franchise, especially in an economy that has experienced economic downturns. Look for franchises where franchisors offer debt financing that will support the entire loan.
If you are using a Franchise Consultant to help you, you can ask him or her to check with the franchisor for specific conditions and the payment schedule. In addition to lending you the money, some franchisors who have been playing the game for a long time may have developed relationships with franchise financing companies or with companies where borrowers agree with lenders to ensure that you can buy a franchise without money.
Most franchisors offer debt financing and will support all or part of the loan. These loans can be organized in different ways, so check with the franchisor for specific conditions and the payment schedule. Some franchisors can also help rent the necessary equipment, which generally accounts for a large portion of startup costs. Some franchisors offer first-time incentive programs for veterans, minorities, or franchisees, including a reduction in franchise fees or other costs or special financial assistance. Be sure to check with the franchisor for the programs they can offer if you fall into one of these categories.
#5 Ask Your Loved Ones For Help
To make your franchise operational, consider asking your friends and family for help. These sources can be easily convinced than others when it comes to getting your starting capital to buy a franchise. However, note that financial assistance from family and friends is likely to come with a chain, and it would be preferable to draw up a document to formalize any agreement reached.
#6 Find A Business Partner
A problem shared is a problem solved, as the saying goes – and the same goes for investment. Going into business with someone else means that you can share the costs (but also the profits!). It’s also a great deal to work with someone on a day-to-day basis, especially when it comes to agreeing with the big decisions that come with ownership of a business – so take that into account.
If you do not have the resources to buy a franchise, consider hiring somebody who does and forming a partnership. A companion, relative, associate, or anybody with money to invest can become a partner. However, be aware that creating a partnership means that you will assign partial ownership of your business. This means that you will not be the only one to make decisions or make a profit.
When finding a business partner, work with a lawyer to draft all documents and agreements. Having the right documentation doesn’t just protect all partners; it also ensures that you remain in compliance with the regulations of the Securities and Exchange Commission.
#7 Online loans
The web has made it easier than any time in recent memory to find loans to buy a franchise. Unfortunately, as a startup, it can be challenging to find a competitive commercial loan. Creditors assess risk by looking at factors such as your personal and professional credit profile, your annual income, and your time in business. If you haven’t started your business yet or are just starting, finding funds with favorable rates and terms can be a challenge. One option you have, however, is to take out a personal loan for companies. When you sign up, you use your personal information – personal and historical credit scores and annual income, for example – to qualify for financing. This loan can be used to buy your franchise or finance other upfront costs.
Nerd Wallet provides a great list of online loans that you can apply for to fund your franchise. Make sure you also ask your Franchise Consultant for his or her recommendations as well.
#8 Home Equity Loans and HELOC
If you own your own home, you can use your equity to secure an initial loan for your franchise. Equity is the contrast between what is owed on the property and the value of the property. With an equity loan, however, you will not be able to borrow the full equity value. Most lenders will provide only 80% of the value of your home, less what is left to pay. The funds can be utilized for any purpose, including to cover startup costs and franchise fees for your new business.
You can also consider a home equity line of credit (HELOC). Instead of a lump sum, you will have access to a flexible credit line that is backed by equity in your home. You will be able to withdraw funds as needed up to the credit limit set for a specified period. This is known as the draw period, which lasts a year. After it ends, you will enter the refund period. As HELOCs are a form of revolving credit, it is possible to resume the withdrawal period after payment of the borrowed funds.
Competitive interest rates, extended payment terms, and flexible use of funds make housing value loans and HELOCs an excellent option to cover the costs associated with buying and operating a franchise. On the other hand, however, your assets are in danger if you opt for your loan.
In addition to having equity, you must also meet your lender’s other requirements. This includes a high personal credit rating, a low debt-to-income ratio, and a solid payment history.
#9 Rollovers As Startups (ROBS)
Another way to get the money is to use the funds you already have in your retirement account. Typically, withdrawing money from your account in advance will result in fines. However, you can avoid these fines and access your funds in a matter of weeks with a rollover plan for startups, also known as ROBS.
Rather than borrowing from a lender, a ROBS plan allows you to use your retirement funds to start your own business. A new C- corp is created, and a new pension fund is created. Funds from the existing retirement account are transferred to the new retirement account. These funds are used to buy shares in C corp, giving you access to the money you need to grow your business.
Qualifying for a ROBS plan is easy, you only need a qualified retirement account. You do not have to worry about having a high credit rating, some income, or any other requirement needed for different types of financing. Since it is not a loan, you also don’t have to worry about paying interest to a lender. The downside, however, is that if your business fails, you risk losing your retirement funds.
Although you do not need to pay interest to a creditor or pay fines for early withdrawal of funds, you will need to work with a ROBS provider. The installation fee only, the supplier ROBS, can help you configure your C-corp and retirement account. You may also be required to pay a monthly fee so as to cover for maintenance and reporting in your account.
#10 Cheap Franchises
It does not have to cost a fortune to start a profitable franchise. Investing in a franchise can be relatively cheap and comfortable, with low upfront costs. Several very lucrative low-cost franchise opportunities offer the potential for financial independence when running your own business. It is just a matter of finding the right solution for you and your budget. With your lower investment costs, you will have affordable franchises that won’t cost you much.
If you are saving money or another source of funding, look for lower-cost franchise opportunities. Big players think McDonald’s, Chick-Fil-A, and other established franchises are generally the most expensive to buy and operate. Instead, focus on more affordable opportunities that will allow you to own a business.
Also, to find low-cost startups, you can also search for franchises that offer discounts for new owners. For example, some franchisors offer discounts on franchise fees for women, minorities, and military and veterans. You can start your search by consulting our franchise options at low prices.
Points to consider before applying for a grant/loan
Before applying for financing, it is a good idea to have a solid business plan to understand how much you need to borrow to start your franchise. This should include the cost of any equipment, commercial rent, marketing costs, and working capital to ensure that you are solvent until your company starts generating good earnings. A good franchisor will work with you to help you get an accurate picture of the cost of your franchise. It is also essential to consider how much you can reasonably afford to invest in the franchise to complement any commercial loan, as it is unlikely that a bank or franchisor will finance 100 % of the cost.
Create A Franchise Business Plan
If you choose to apply for a grant, a contracting agency will be eager to see that the money you provide will support the success and, eventually, the expansion of an established and cutting edge business. Therefore, it is a good idea to help your application with a robust business plan. The business plan should include an executive summary, personal information, your experience and skills, an overview of the franchise, management, business operations, financial projections, capitalization, marketing strategy, personal finance details and the amount you wish to borrow.
A well thought out business plan can make the difference between accepting or rejecting your loan application. A complete business plan should include an intimate, technical study of the company you plan to start; professional formats, accurate projections, and cost analysis; working capital estimates; an indication of your “interpersonal skills”; and an appropriate marketing plan, in addition to including certified statements of your assets and various credit references.
Franchise Financing Options
Most franchises offer some program of financing, and many lend up to 70% of the initial investment costs for applicants that meet your criteria franchise. This is a commercial loan that will need to be repaid during your franchise journey, but it helps to bridge the gap between jobs and franchises, covering upfront costs. Ask the chosen franchisee about the existing financial links he has already established. The franchise may have already established a relationship with a bank, which means that you can access preferential rates and terms in your loan agreement.
Otherwise, franchises are generally viewed more favorably by banks when it comes to approving a commercial loan, so you can likely obtain financing from a significant bank relatively quickly.
Becoming a franchisee of a newer company can make it somewhat difficult to obtain financing, as it will not have such a long history of success and, therefore, can be considered a higher risk. Work with your franchisor to develop a solid business plan that you can present to potential creditors, demonstrating why they should invest in your business and your franchise business.
Which Bank Should You Choose?
Although most banks in the world offer commercial loan products, it is best to seek a lender with experience in franchising. This means that you need to go to the bank, which can provide useful information about your financial projections and offer customized products that take into account the unique challenges and requirements of becoming a franchisee.
There are a lot of funding methods available, do your research to find the one that works best for you, and have an interest rate that suits your company’s needs. You can apply for a secured loan at a fixed or variable rate or finance and lease short-term assets. Your franchisor, chosen bank or accountant can help you decide which option is best for you, considering your current financial situation, your projected income, and how quickly you want to pay your loan.
How Much Can I Borrow?
The amount you can borrow will vary. In the case of well-established franchises, the franchisee must provide at least thirty percent of the installation costs, including working capital. Ideally, this should come from personal savings and not from loans. In less established franchise cases, the lender may request an even larger capital contract before approval. Typically, you will need to secure the loan with personal property, which is usually property or belongings that can cover the amount if you choose to pay your payments. If you don’t have the right assets, but you have a solid business plan, the corporate financial security system can help. You can also secure the loan through a guarantor, who can be a close relative or a partner.
Discover What You Can Afford
Before you start seriously considering the different franchise options, you need to know precisely what you can afford. This means having a good understanding of your current finances, including your assets. Compile a balance sheet that comprises all of your assets and liabilities and determine what you can invest. That way, you know how much you still need. It is often worthwhile to seek the advice of a financial advisor at this point so that he can help you determine what you can afford – and what you cannot. Starting a business will always require a certain degree of risk, but make sure you take the only smart risk – and don’t overburden yourself financially.
Find The Right Franchise
Franchise costs vary widely, depending on the business and the franchisor. After selecting the few companies that you think fit your overall goals and objectives, it is important to contact these companies for necessary information about franchise opportunities. The contact can be through the website or physically to acquire the material you need. Evaluate all the information you obtained from the different companies you contacted to determine whether the new data you received still matches yours. You shouldn’t worry about spending time with those who don’t fully match your goals and objectives. Make your research and look for franchises that match your financial situation. So you don’t have close to half a million dollars to invest in a retail franchise, that doesn’t mean the franchise is irrelevant to you.
Conclusion: Is it Possible to buy a franchise without money?
As we’ve pointed out, it’s impossible to buy a franchise without any money, however, the funds can be borrowed or raised through strategic funding options. Starting a new business can be daunting. But buying a franchise can be a realistic and much more affordable entry point for many entrepreneurs. While buying a franchise is one of the easiest ways to start a business, finding the right source of funding to start your business can be challenging, and finding affordable financing is available. The important thing is to research all your options, be creative with your funding, if necessary, and choose the option that works best for your business in the long run.