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Article - Creative Franchise Financing 2

Creative Franchise Financing in a Credit-Challenged World

You can be your own boss, own a franchise, and achieve your dreams for less than you think.

Part 2: Getting Creative – People want to help you succeed, so ask them

Let's say you want to own a franchise – you may think that you have to dump all your own money into it. While accessing personal savings is an obvious source of business financing, entrepreneurs today are getting creative when it comes to achieving the dream of owning a business and growing an asset. (See Why Own a Franchise.)

Here are some examples of how you can cut down start-up costs and get into business now. 

  1. Love Money. A favorite source of funding a franchise or small business, outside of one's own personal savings, is money from friends and family. If you are borrowing from anyone other than a bank, the team at® has these recommendations:
  • Document the loan – a simple promissory note works
  • Agree on repayment terms with reasonable interest
  • Set clear expectations up front about risk
  • Make prompt payments 
  1. Retirement Savings (401K, IRA, SEP, etc.) Many franchise owners have converted their retirement plans to finance their new business. They want to be in control of the return on this money as compared to having a Wall Street financial manager in the driver’s seat. (See Why Own a Franchise.) Accessing your retirement dollars for buying a franchise can be done in 90 days, but be sure to use a trustworthy company, such as Benetrends, SD Cooper or Guidant Financial. 
  1. Leasing. Some physical assets – furniture, fixtures, computers and other equipment – can be leased instead of purchased. For example, four new computers can run $8,000 or more, but can be leased for a fraction of that. This allows you to reduce the total capital expenditure needed to get the business rolling. Rather than using new income to pay the bank note, leasing increases the available monthly operating dollars. 
  1. Landlords. You'll find commercial office and retail space in great supply and low demand almost everywhere. Landlords are anxious to fill that available space. In exchange for a long-term lease (five years or more) a landlord may help pay for some or all improvements to make the space suitable for your business, such as adding walls for office space, additional bathrooms, paint, new doors, etc. You may even be able to negotiate “free rent,” typically one to six months – but don't be greedy! 
  1. Vendors. For some businesses, the vendors are so eager to get their products to the public, they may offer generous lines of credit to finance initial inventory. This can significantly reduce needed capital. Vendors may even help with initial marketing or grand opening events. Just ask!    
  1. Customers. For some franchises, pre-opening sales of memberships or service contracts can be a great source of interest-free financing for your business. Many customers will pre-pay in exchange for a discount. Plus, these early sales help enhance cash flow as the business takes off.

 To see how this creative financing for your new business works with real money, see part 3: Let's Do the Numbers. Also see Part 1: The Business Loan: Your Capital, Collateral, and Your Credit Score.