Starting a franchise with no money is obviously not the ideal way to begin. But sometimes, it’s just the way it is. In this post I will go through a complete rundown of what to do about getting a franchise off the ground when you have nothing in the bank.
First, take a look at your finance options
Sorry to break it to you but you will need some money if you want to start a franchise. This means that from a zero funds starting point, your first job is to try and find a source of financing.
Some of the newer franchises may actually lend you the money to start a franchise operation. This is not always the case, and is most definitely not the case with established franchises like Subway. But if a franchise thinks you have what it takes, it may lend you the money.
A franchise that is willing to lend you the money for start-up costs may also be happy to lend you money for equipment. Be aware that this arrangement is not common, but you should most definitely look into what a franchise offers before you think you can’t get the money in place.
Some franchises offer financial incentives for certain groups, such as veterans and minorities. Again, take a look at their offers and see if they can help you get through the door.
How to finance a franchise with no money: Use your equity
You can access the equity in your home quite easily. It can prove to be a great way of getting your hands on money that you can pump into your new business.
Consider a home equity loan or a home equity line of credit (HELOC). A home equity loan can give you up to 85% of the equity you have gained over the years of owning your home. In some parts of the world, home equity loans are known as second mortgages. This is because you are borrowing money against your home.
You will get the equity as a lump sum. This means if your franchise opportunity is going to cost you $75,000, you could pull that down in an equity loan as one amount.
You can expect a 5-30 year term on an equity loan. You can’t go in with your eyes closed though, because there is the possibility that you could lose your home if you don’t make the payments. Remember, this is money secured against your home.
A HELOC allows you to have a line of credit rather than a fixed sum. You can borrow money whenever you need to, up to the credit limit provided by the lender. And while home equity loans are a fixed amount with a fixed interest rate, HELOC agreements follow the interest rate on its ups and downs.
The trade-off is simple. With a HELOC you can manage your borrowing more carefully (you may not need as much as you thought you did) but your interest rates can go up suddenly.
Fancy a deep dive into a franchise idea?
How to finance a franchise with no money: Team up
Partners are a huge part of the early days of many franchises. These are people who are able to invest some money into the new franchise business and help get it off the ground.
You can approach members of your family for small amounts of money, like crowdfunding. This is becoming more common these days. Alternatively, you can approach individuals who are able to offer larger sums for a share of the business.
Like all serious business agreements, even if they are with family members, you should seek the advice of a lawyer. They will be able to draft a contract that protects everyone when large sums of money are at stake.
How to finance a franchise with no money: Take it to the bank
You can of course ask for a simple and straightforward bank loan. Bear in mind that a bank will only lend you money if you have good credit. After looking at a ton of franchise opportunities online, I have found that you will most likely have to stump up around 20% of the original start-up costs if a bank is going to take you seriously.
It’s not all doom and gloom though. You can offer collateral, such as your home. And you may even find a franchise offer that has a lending system attached (when they partner up with a finance company).
Small Business Administration (SBA) loans are guaranteed in the United States. You obtain a loan from a bank, but the SBA guarantees to repay it if you default. In many cases, SBA loans are easier to get than conventional loans.
Additionally, the SBA has a list of franchisors it has approved. The application process is fast if your franchisor is on the list.
SBA loans are still hard to obtain. In general, you need a good credit score (as high as 680). It will also require you to come up with a down payment of 20-30%.
So what can you do?
If you want to avoid a high-risk situation, you should probably go down the route of finding partners. Unless you are committed to working your socks off for an established and successful franchise, it’s probably not a good idea to bet your house against your success.
If you are starting a franchise with no money, don’t worry. I have found that it is worthwhile looking at all of the options above. You may discover that you have to borrow from your family first, then take out a loan to pay back later, after you have become successful. Or you may have the 20% required for a bank to lend you some money.
In the next post in this series, we will look at finding the right franchise for you.
I’m Sahail. I am on a personal mission to help people make money, save money and stay healthy (so they can enjoy it). Join me.