You’ve found the ideal business in the thriving world of franchising and are ready to live the dream of business ownership where you are supported by the strength of a national franchisor.
As you ponder how to pay for it, there are several sources of funding that you may want to look into:
- Home Equity: If you own enough of your home and feel confident about your business decision, you can take a second mortgage or set up a line of credit with your lender. You will not need a business plan for this type of financing so this method can often be the simplest route to business ownership.
- Small Business Administration Financing: SBA backed loans can be a great source of funding especially for those who may not quality for traditional financing sources.
- Traditional: This is where you go to a bank and get the money. You will need a pretty good credit rating, a solid business plan and some on-hand liquid capital. However, the rates can be very competitive if you meet all of the criteria and your franchisor might even help with your business plan.
- IRA Money: You can roll your IRA money into a business loan. The advantage is that no penalties are associated with this conversion and you will not need a business plan or good credit because it’s your money.
- Franchisor Programs: Some franchisors offer in-house financing or have established partnerships with lending companies. Because the lending company has confidence in the concept, it can be easier to get a loan.
You can also borrow money from family and friends. If you have built up good credit, you might even be able to get a loan online or quality for an unsecured business credit line.
The point is that there are several alternatives to franchise financing. Find the one that works best for you.
Did you know that you could finance your business from your 401K or IRA without incurring a tax penalty? When we say finance, we mean all costs associated with your business from living expenses until you get profitable to franchise fees.
Economy Affects 50+ Age Group
Our economy has changed dramatically in the past eight years. One result has been that many employees over 50 years old have lost their jobs and are having difficulty finding replacement employment. Often, they have valuable work experience and retirement savings to use toward another venture because they are not ready to retire. Many would like to create a career bridge to retirement while building an asset that can later contribute to their finances when that occurs.
401k/ IRA Financing Advantages
In our experience with franchise candidates 50 years old and more, we see retirement fund franchise financing becoming an important resource for getting into business. The benefits over borrowing from banks or other financing sources are many:
- You pay the principle and interest on the loan back to your retirement fund. Of course, your 401K or IRA takes the risk. But that risk is often the same one that you would take by borrowing since most lenders require a personal guarantee to pay off your loan.
- Funding via your retirement account does not impact your credit report or score.
- It is often faster to get the funds via 401K/IRA rather than by typical lending processes.
- There are several credible firms available to assist you in setting up funding via your 401K or IRA. These companies have experience in setting up a government accepted C-Corporation inside your retirement account so there is no tax impact and it passes legal requirements as a non-personally directed investment.
- Often the investment of the C-Corporation is only one of several funds within your retirement account.
Your C-Corp will cost money to set up and there will be a monthly management fee to the company you select to handle this transaction. The usual cost of this is $4,000 to $5,000 for set up and under $100 per month in management fees. All of these cost are expenses that are tax deductions for your C-Corp.
Choosing a company to assist with setting up your 401K or IRA as a funding source should be chosen by performing due diligence just like in every aspect of your business buying exploration process.
Two sources that will come up when searching for 401k business funding are Guidant and Fran Funding. Spend time discussing their services with them so you can judge how exactly they will support your business.
(Pic from Fran Net.com blog)