Franchise fee: Most companies charge an upfront fee to start a franchise, paid in a lump sum or installments. The amount varies by company, but it’s typically tens of thousands of dollars and usually is not refundable once a franchisee is accepted. For example, Jamba Juice charges $25,000 per store, and Hilton Worldwide charges $75,000 to start a 150-room Hilton Garden Inn.
One way to minimize the risks of opening a business is to invest in a franchise concept, rather than starting a stand-alone business. Up to 80% of new businesses have failed after five years, while franchises offer support, proven business practices, and a recognizable brand name to draw sales. Owning a franchise provides a proven business model to follow, while still offering the the benefits of owning a your own business. Banks like financing franchise startups for the reasons stated above.
Glad to see your comment! For ideas on which franchise you should work with you can check out our articles on the best coffee shop franchises or the best restaurant franchises. Additionally, to make sure you’re finding a strong franchise, you can read our article on the 50 best and worst franchises by SBA default rate. I hope that helps, and good luck with your future business!
Once you have chosen a name for your business, you will need to check if it's trademarked or currently in use. Then, you will need to register it. A sole proprietor must register their business name with either their state or county clerk. Corporations, LLCs, or limited partnerships typically register their business name when the formation paperwork is filed.
- Let's talk a little bit about the future. At some point your business is going to near the final stages of being a small business and start to evolve into a medium, or even a large-sized business. The question is: who is going to lead this business at that point? Before we talked about the org chart and the difference between the founder and the president. Odds are, you have been filling both roles. The founder is the visionary, and the president is the person who makes the business run. But, when it comes time to transition into that medium-sized business, really it's time for you exit one or both of these positions. Why is that? Well, you have learned certain skills that have helped you succeed as a small business owner, but, a different set of skills is required for a large or medium-sized business, and there are people out there who have those skills. They have that expertise, and it's much better to hire someone else, rather than you put this burden on yourself. I've often seen…
A ROBS let’s you fund all, or part, of your new franchise with retirement savings (401k, IRA, 403b, etc) without paying early withdrawal penalties and taxes. If you have at least $50,000 in your eligible retirement account a ROBS can help you fund 100% of your franchise, be combined with seller financing, or be used as a downpayment for an SBA loan. Learn more by speaking with our recommended ROBS provider, Guidant, who offers an initial free consultation.
Your second option invokes the idea of a “warmup” period for your business. Instead of going straight into full-fledged business mode, you’ll start with just the basics. You might launch a blog and one niche service, reducing your scope, your audience and your profit, in order to get a head-start. If you can start as a self-employed individual, you'll avoid some of the biggest initial costs (and enjoy a simpler tax situation, too). A payment processing company, such as Due, can be a big help when you are struggling to invoice and follow up professionally.
The lender will want to know how much funding you are seeking and how the loan proceeds will be used. Will the loan be for equipment or capital expenditures? Expansion or hiring? Increase in inventory? Enhanced sales and marketing efforts? New research and development of technology? New product development? Expansion into new facilities or territories?
Maybe you want to build an empire and become famous, or create a wealth-generation machine that you can pass on to your children. Or perhaps you can’t convince anyone to recognize your unique vision and you’ve decided that it will never come to fruition unless you strike out on your own. Or maybe you’re thinking of self-employment because you’ve been unemployed for so long that you feel you’ve exhausted all other options.
If you've always wanted to start your own business but have been afraid of the financial risk involved, opening a franchise might be the perfect solution for you. With a franchise, you get all of the independence, responsibility, and potential profit associated with owning your own business. Unlike starting a business from scratch, a franchise comes with a proven business model and a well-known brand, reducing your risk of failure dramatically. Lenders are well aware of the benefits associated with opening and operating a franchise and are more willing to approve franchise loans than a standard small business loan for a start-up.
Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .
The franchisor: Some franchisors help finance new franchises by waiving fees or partnering with lenders to help franchisees get loans. If a company offers funding, it’s usually listed on its website and in Section 10 of the Franchise Disclosure Document. Compare the terms of the franchisor’s financing with other options to find the best source of funding.
On the other hand, food trucks and vending machines are trends helping to mold the industry even though they are not new concepts. The consumer desire and such convenience have become overwhelming, thus inspiring a more innovative variety of food trucks and vending machines. Their market typically consists of business parks and buildings, transit areas, tourists spots, sporting, cultural, and other entertainment events, and tertiary education institutions. Thus, for example, the vending machine company named the Burrito Box, makes all their food off-site and franchises refill the contents daily. With this approach, consumers get the same quality of food that they would get out of fast-casual restaurants. As follows, the capital it would take to start up a company of this sort ranges from $50,000 to $250,000, but it all depends on how equipped the truck comes. Its also important to mention that since consumers have demanded more artisanal products, food businesses are investing in fresh and healthier ingredients and options. Which can be seen already with specialty sandwiches, locally sourced products, vending machines with healthier snacks, build your own concepts (assembly line formats, similar to Chipotle), and upscale versions of the basics. Either way, this model is becoming more popular, lucrative and assessable to entrepreneurs of all kinds.
Franchise business loans typically come with more attractive terms than you are likely to find for any other type of start-up business loan. This is because lenders consider the financial stability, business model, and previous success of the franchise parent company when reviewing a loan application. Banks and alternative lenders are finding franchises to be an increasingly attractive investment. In 2011, the SBA reported approval of $1.5 billion in 7(a) loans for franchises, up from approximately $826 million the previous fiscal year. The 7(a) loan-guarantee program is the SBA's most popular loan program.
Rent and rent escalations. Some landlords will give free rent for the first month or two of a lease. Fixed rent over longer-term leases is relatively rare. Sometimes landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange for a CPI rent increase that does not kick in for at least the first two years of the term. Then, try to get a cap on the amount of each year’s increase. If you have to live with a rent escalation clause, try to negotiate a predetermined fixed increase; for example, a rent of $5,000 a month the first year that would only increase to $5,200 a month the second year and $5,400 a month the third year.
After speaking with several Brokers to help with our SBA loan, Karen was the only one who took her time and explained in full detail what our best options would be. The process was so easy, in less than 48 hours after submitting the application to the Bank we had a firm approval and we we’re ready to close on the loan in less than 10 days. I worked in the Mortgage Industry for 20 years and I’m VERY impressed with the service Karen provided us. This couldn’t have been any easier!!!!!!!!
That is why you should use an administrative service to manage your loan, and give you a professional platform to raise the money and make payments to. This can make it easier for people you know to lend money to your business, and you won’t have to worry about any of the paperwork or tax implications. It could also improve your chances at getting funded.
You’re applying for a business loan, and you may even be organized as a corporation or LLC. However, lenders will almost always want to hold you personally responsible for the loan. If they don’t do that and the business fails, there’s nobody left to repay them. But if you make a personal guarantee on the loan (which is likely a requirement), they can go after you personally, and your personal credit will suffer if you don’t repay.
Brad has spent more than twelve years working at the crossroads of business development, marketing, and social media. He was featured in Entrepreneur Magazine as a young entrepreneur, launching his first successful business at the age of 15. Up until joining lynda.com as an online marketing manager in 2012, he honed his skills working as a consultant alongside brands large and small, including LegalZoom, Clear Channel, eSolar, Dickies, and Urban Outfitters. He has also served as an advisor to multiple startups, providing marketing direction and strategic advice.
If you are a person with no credit rating, you will need to establish one before you will be able to get a small business loan. Basically, you establish a credit rating by buying things on credit and paying back the money you owe. Your loan repayment history plays a big part in establishing your credit rating, but all your "credit" dealings make up the history that's used to determine your credit rating.
6. Create local awareness and establish a network. Join chambers, business associations, community groups, etc. Find ways to get involved. Networking is a great way to capture business leads as long as you don’t come on too strong. It allows you to meet new contacts and create more brand awareness and new referrals. Sponsor sporting events, nonprofit events or anything that is for a good cause. Get your name out there while also being a good community steward. Give away SWAG (promotional items with your business name, logo and contact info on them). T-shirts are a great example of free walking advertisements for your business.
Assignment and subletting. Startup companies should negotiate enough flexibility in the assignment and subletting clause to allow for mergers, reorganizations, and share ownership changes. Watch out for a clause that says a change in more than 50% of the company’s stock ownership will be deemed an assignment that is prohibited without the landlord’s prior approval. As your company grows and new people invest in it, this clause can be inadvertently triggered.
The ROBS option allows you to use funds from your retirement savings to finance your franchise without paying early withdrawal penalties and taxes. This can be an attractive option for franchisees that struggle to get traditional loans and are comfortable with some amount of risk. Those with substantial retirement savings may feel most sanguine removing a portion of those funds for this purpose.
However, despite the tendency of commercial banks to favor franchise businesses, you are still subject to the bank's underwriting and lending policies. The bank still has to review your net worth and credit history to determine whether you can pay back the loan advanced to your business. In some cases, you may also have to provide collateral to secure your business loan.
You also will need to file certain forms to fulfill your federal and state income tax obligations. The forms you need are determined by your business structure. A complete list of the forms each type of entity will need can be found on the SBA website. You can also find state-specific tax obligations there. Some businesses may also require federal or state licenses and permits to operate. You can use the SBA's database to search for licensing requirements by state and business type.
And don’t forget that unlike their independently-owned competitors, franchise owners don’t get to choose when to schedule expenses or which suppliers to work with. Their business model might have been passed down by the franchisor but it’s up to the franchise owner to figure out how to grow the business without endangering profits or failing to cover mandatory expenses.
Various financial aid programs help certain types of businesses and borrower start up franchises. For instance, some companies have programs designed to attract women and minority candidates. Many others offer discounts on franchise fees for veterans who are interested in franchising. You can find a list of options in the International Franchise Association’s VetFran Directory.
Outside of the typical startup costs, there are different costs that are unique to franchise businesses. First is the franchise fee, an upfront fee to the franchisor for the right to use the company’s branding and model. It can be paid in a lump sum or in installments, and varies widely by industry and company. It will likely to be at least $10,000 – sometimes substantially higher – and is typically nonrefundable. Franchisors are also likely to charge recurring royalty and marketing fees – usually arranged as a percentage of sales at the franchisee’s store – usually 4 to 8 percent for royalties and 2 to 4 percent for marketing.
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Your place on the credit spectrum is one factor that will determine which loans you’ll qualify for. You can get your credit report for free from each of the three major credit bureaus — Equifax, Experian and TransUnion — once a year. You can get your credit score for free from several credit card issuers as well as personal finance websites, including NerdWallet.