Five of the Best Financing Options for Your Business
Running a small business is a great way to enjoy freedom and to do work that you love, but having the support and infrastructure of a large corporation is useful in a lot of ways.
Getting started in franchising can provide many benefits as well as challenges. Many people opt to open a franchise so that they can enjoy the flexibility of being the business owner, combined with the support and existing contacts and infrastructure that a bigger company would have.
Opening a franchise is expensive, however. You need to invest a lot of capital, and there could be a franchise fee as well as advertising costs and ongoing royalties. Not everyone has access to the funds that are required for that.
If you need a business loan, then you will need a good business plan. It's a tricky world to navigate.
Let's have a look at a few of the best franchise financing options for your business.
1. Franchisor financing.
The prospective franchisor will be your first port of call. A lot of corporations have tailored financing solutions that can help would-be franchisees to get started. Some corporations will have their own relationships with specific lenders, and some will be willing to provide capital from their own corporations, as long as the franchisee has a sound plan and the skills to run the franchise.
Accessing finance this way can be convenient, and in a lot of cases you end up with a one-stop shop for the whole of the franchise, getting finances, equipment, advice and other resources all from one place.
If this is a route that you go down, then you will find that it saves you time and stress. The franchisor already knows the business inside out so they can give you good advice and already have an understanding of the risks that your business faces.
The franchisor financing agreement that you are offered could vary from a modest loan to as much as 75% of the debt burden that the business faces. They may offer deferred payments while the business is in the start up phase, or they may offer repayments on a sliding scale. It is important to seek advice from an independent business attorney or an accountant so that you know exactly what you are agreeing to.
2. Traditional bank loans.
Another popular option is to use a traditional term loans from your bank. Term loans are the thing that most people think of when they are considering financing. Student loans and home finance are examples of term loans. With this type of loan, you take out the loan up front, and then you have to repay the loan, plus interest, in monthly instalments.
Max Funding’s bad credit team explain “when you apply for a commercial bank loan, the lender is going to look at both your personal credit history and the business plan. They will use those documents to consider whether you are creditworthy, and to work out whether they think you can pay the loan back in a timely fashion. You can safely assume that if you have a strong financial history and a good credit score then you will be able to get good terms for your interest rate.”
Ultimately, the more quickly you are able to pay the loan back, the less interest you are likely to be expected to pay.
3. Alternative lenders.
Alternative lenders usually cost more than commercial lenders, and expect you to repay the loan more quickly. They also tend to lend out smaller amounts of money. With that said, they are a good option if you only need a small amount of money and your credit rating is not good enough to be able to use a mainstream lender.
They are willing to lend money to people who are in higher risk categories, and who do not qualify for traditional loans. So if you have a life-changing opportunity, and you are struggling to find a way to get a loan, don't give up without speaking to some alternative lenders first.
Crowdfunding is a relatively new way of financing a business, and it's something that can work well in a lot of industries.
You have a lot of options when it comes to accessing crowdfunding. There are personal pages and websites that let you market your funds, and there are also options for people who need a bit of extra help, in the form of businesses that will run crowdfunders for you.
According to the career coaches at Open For Life, creative sources of funding are becoming more prevalent. They explain “with crowdfunding you are usually accepting donations with the promise of giving a product or some perks in return. This makes it an affordable way of accessing funds. It can be risky if you aren't certain that you will be able to deliver, since it means that you could end up with bad PR and disgruntled customers, but the perks are there. It's a good option if you can't access funds elsewhere.”
5. Borrow from family or friends
One last option that a lot of people overlook is borrowing from friends and family. Whether you borrow with a promise to give back, or ask for the money outright, or you start the business as a partnership, there are lots of options.
They do, however, come with the risk of causing issues down the line if it takes you longer to give the money back than you hoped - or sometimes if the lender sees the business being very successful and asks for more money from you down the line because they see themselves as a partner, but that wasn't the deal you offered.
For this reason, it's vital that if you do borrow money from family or friends, you lay out the terms in writing so that there is no room for confusion or disagreements. It can feel strange doing this with people you are close to, but when there is a lot of money on the line it is worth the precaution.