8 financing questions to consider when purchasing a franchise.

Buying a franchise is a big decision. Aspiring entrepreneurs have to consider the franchise’s business model, the revenue opportunities, the territories available, and the type of support they’d receive from the franchise they decide to purchase. But buying a franchise also requires upfront capital. Once you’ve done your due diligence and settled on the right franchise for you, next comes finding the right financial backing which can sometimes be a distressing task.

Why is it important to have financing options before purchasing a franchise?

Starting a business requires a lot of hard work. Initial costs can be overwhelming, including real estate, equipment, administrative costs, inventory, training, and marketing. You will also need enough working capital to cushion the company at the beginning.

But if you’re considering how to buy a franchise, you have many options. Owning a franchise is the perfect way to test the entrepreneurial waters. You get to try out being a business owner with a large corporation backing you up. With many financing options available, you have even more flexibility as a potential franchise owner. And you can set yourself up for success before you even open your doors.

What are the best practices for getting financial backing?

You need to understand what you’re working with now—and what you can handle in the future. First, determine your net worth by completing a personal balance sheet. This should include both your assets and liabilities.

Assets are what you own: cash on hand, checking and savings accounts, real state holdings, vehicles, securities, and other property. Liabilities are what you owe: all bills, charges, and debts, including mortgages, auto loans, and credit cards.

Next, subtract your liabilities from your assets to determine your net worth. After that, review your credit score, which is based on income, repayment history, and total balances. Address any inaccuracies or inconsistencies early on in the process so that you have the best selection of financing options available to you. Then consider an old rule of financial thumb: Never invest more than 75 percent of your cash reserves.

What franchise financing options are available for people considering starting a business?

In some cases, franchisors will provide financing for franchisees. CMIT Solutions, however, does not offer in-house financing. We do provide referrals, though, for third-party financing.

Some financing options include:

  • SBA loans. A Small Business Administration loan is a government-backed loan aimed at helping entrepreneurs in the United States to fund their new businesses. These types of loans can be used to finance initial start-up costs and working capital. The SBA does not directly lend funds, though. Instead, the SBA provides a guarantee to the lending bank in case a business owner defaults on their loan. CMIT Solutions franchisees are eligible for this type of financing, including the SBA 7(a) loan, which can be used for almost any business purpose and requires a smaller down payment for franchises than for new start-ups.
  • 401(k) or Rollovers for Business Start-ups (ROBS) financing. This is an easy method for financing a small business or franchise. ROBS involves drawing money from your 401(k) or IRA retirement account to start or buy a business without incurring an early withdrawal fee or tax penalty. This is not a loan—a ROBS provides access to your retirement money so you can build the lifestyle you want today without going into debt. This solution works well for individuals who may not have a lot of cash on hand. It also works well for people coming to franchising from previous careers.
  • Business term loans. These traditional loans provide entrepreneurs with access to lump sums of capital to spend on their businesses. Generally, business term loans run for three to five years with a fixed interest rate and set monthly payments. Terms may vary.
  • Unsecured loans. Unsecured loans essentially combine multiple credit cards that allow high balances, don’t charge cash advance fees, and offer 0% interest for at least a year. Unsecured loan companies apply for and liquidate high-balance credit cards on your behalf but without multiple credit inquiries affecting your credit score. These types of loans require no collateral, so financial institutions extend loans based mostly on your credit score and history of repaying past debts. After the initial introductory offer, unsecured loans may have much higher interest rates than secured loans, adding extra pressure on new franchisees to make money more quickly.
  • Business line of credit. This gives new businesses the ability to access capital incrementally. This can help finance large upfront purchases or smaller day-to-day expenses. These revolving loans provide access to the full amount of capital once incremental borrowing is repaid.

CMIT Solutions also offers a 20% discount on the franchisee fee for all military veterans.

Should I write up a business plan?

A good business plan can provide a big boost, especially if you pursue a traditional loan. Some financing experts even believe a well-crafted business plan can determine whether your loan application will be accepted or rejected.

Luckily, potential franchisees can leverage a franchisor’s existing business model. Business plans can include revenue projections and cost analyses, working capital estimates, and marketing strategies. Combine this with good credit references and you’ll have a leg up on financing options.

What if my financing options are limited?

There are many alternative options available to potential franchisees. You can work with family and friends to borrow money outright, ask for a gift, or bring someone on as a business partner. This kind of loan can come at a good price with even better terms—as long as you avoid disagreements and draw up a contract that is clear about repayment terms and expectations.

Depending on your professional network, angel investors and venture capitalists can also be an option. Other creative options include Internet-based crowdfunding. You can set up and promote your own personal crowdfunding page. Many organizations also crowdfund specifically for franchise businesses or companies operating in certain industries.

If you have any bad marks on your credit history or are having trouble securing traditional financing, crowdfunding is a great option. With interest rates for traditional loans at all-time highs, many entrepreneurs are eager to find alternative ways to finance a franchise. 

What is typically included in the cost of buying a franchise?

New business owners pay an initial franchising fee for the right to use a franchisor’s established brand and business model. That’s a smart way to start a business since it removes a lot of initial risk. But you do have to make a big upfront investment.

Franchises also charge recurring royalty fees, which are typically based on revenue. Franchisors are legally required to provide clear information about such fees in their Franchise Disclosure Document. FDDs also include details about ongoing costs for marketing, promotion, signage, and inventory.

What are the franchise costs for CMIT Solutions?

The franchise fee ranges from $49,950 to $54,950 and varies based on the number of small to medium-sized businesses located in your territory. CMIT Solutions also recommends that new franchisees have six months of working capital, a minimum net worth of $350,000, and liquid capital of $100,00-$150,000. (These recommendations do not apply to those transitioning an existing IT business to the CMIT Solutions system.)

Compared to other franchises, this is a low investment requirement. Some fast food franchises in established markets require a $1 million-$2 million upfront investment. But CMIT Solutions does not require brick-and-mortar locations with expensive leases. Specialized equipment and inventory are also not required to start a franchise business in the IT industry. Many of our franchisees operate from their home offices and only pay for a virtual office with a street address listing.

What else should I consider before I finance a franchise?

Many brokers and franchisors focus on the high-level view of franchise financing options. But consider these smaller details, too:

1.    Work with lenders who understand small businesses and franchising. CMIT Solutions can help with targeted referrals to financing companies we know.

2.    Tell the truth to lenders. Don’t try to hide negative financial information—banks and lenders will always find out. Instead, be honest and provide context about past challenges.

3.    Don’t worry about paying off outstanding debts before applying for financing. Many lenders prefer that you have capital available and a plan to start making money.

4.    Lease equipment to start, or buy used if you can. This helps to conserve start-up capital and improve your overall balance sheet.

5.    Avoid taking out second mortgages or using your kids’ college savings. Every new business is a risk. Protect your home and your children’s futures from that risk.

Want to find out more about franchise financing options with CMIT Solutions? Contact us today.

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