Funding and Investment
Internal Financing
One of the most common financing options for franchisees is by going directly to the franchises themselves. Many franchises offer financing opportunities at some level that can help to seriously alleviate some of the financial burden of opening a franchise. The actual amount of financing available from a franchise varies greatly from franchise to franchise. What exactly they’re willing to help with also varies greatly.
Some franchises will defer part of the franchise fee, offer temporarily reduced royalties, or help cover the costs of necessary equipment. While the interest rates on these forms of financing can be higher than traditional bank loans they’re also sometimes available without collateral requirements. The terms and conditions of these financing options vary so make sure you check with your franchise.
Commercial Lending
Commercial bank loans are another common option, as if you were financing any other major purchase. Like financing from franchisors, the financing available from commercial banks can vary greatly based on the exact situation you are in. Oftentimes the franchise you are opening can play a big role in your ability to secure financing from a commercial bank. If you’re looking to open a franchise with a more proven track record then the bank may be more likely to provide you with a loan, as they view it as a less risky move. The downside to this is that if you’re looking to open a smaller franchise you may be required to provide additional collateral to secure the loan.
Small Business Administration (SBA)
There are also options out there to help you out if you need to use commercial bank loans. The US SBA can provide SBA loans to franchisees to help them out. SBA loans are an interesting situation because they aren’t direct loans to franchisees normally. Instead these loans act as guarantees to the banks making it easier for franchisees to acquire traditional small business loans. These can be especially useful for franchisees that are looking to open smaller or lesser-known franchises that banks may be wary of taking on.
Retirement Account
Last, but certainly not least, a very popular funding strategy that is widely unknown is the legal use of your retirement account. However, this option has a greater level of complexity and should be handled by experts in the financial service industry. They can provide a tax-free and penalty free option for investing your own money into your own company. Over the past five or six years, retirement funds have become one of the most popular ways of funding small businesses in America.
Retirement Account Funding
Here’s how it works: We Form a Corporation.
Then we assist you in rolling funds from your old retirement account into a new 401K plan that we establish for your business. You then wire funds from your new 401K account to your corporate checking account.
Our partners help my clients with each step of the process. It’s key that all of the IRS guidelines are followed. People can’t do this process on their own. They would need to enlist the help of a qualified plan specialist or a third-party administrator like our partners to facilitate the process.
What if your IRA or old 401k doesn’t have enough for your funding needs? Or if you don’t have a retirement fund, or can’t access it because it’s held with your current employer. There may be another way…
Using a 1031 Exchange
Here’s how it works: We Structure the Lease Just Right.....
This is an amazing way to 1031 into Franchise Investments. Your entire buildout and location can be covered by 1031 exchange funds.
Long-Term Interests In some instances, fee-title real estate can be exchanged for leasehold interests. Internal Revenue Service regulations state that a leasehold interest of 30 years or longer is like-kind with fee-title real estate. Subsequent rulings provide that option renewal periods are included in determining the leasehold interest length; thus, if the lease has a 20-year initial term and three five-year options, the length of the lease is 35 years for 1031 exchange purposes.
For example, to avoid incurring taxable gain Dan Smith wants to use an exchange to sell a $750,000 office building and purchase an existing lease on a hunting lodge and 800 acres of land for $850,000. The 25-year lease has two 10-year extensions. Therefore, the leasehold length is 45 years (25 years plus two 10-year extensions). In compliance with IRS guidelines, Smith can sell the office building and buy the 45-year leasehold interest as replacement property to complete a successful exchange.