How Much Cash Do I Need to Invest in a Franchise?
When considering investing in a franchise, one of the most common questions potential franchisees ask is, “How much cash do I need to invest?” The answer can vary widely depending on the specific franchise, your motivators for business ownership, and your personal financial situation. As a franchise consultant and coach, I’ve walked many clients through this question.
Cash Investment and Financing for a Franchise
Generally, you will need between 20% and 30% of the total franchise cost as a down payment in cash and you will finance the remaining balance – similar to how you would buy a home.
For example, if a franchise costs $200,000, you’ll need to invest approximately $40,000 to $60,000 down and finance the remaining $140,000 to $160,000. My franchise coaching clients often finance their business through an SBA loan, which is based on strong personal credit. If liquidity is a challenge, clients can take a portion of their 401K/IRA without penalty and use it for their initial cash injection. This can be done through a program called Rollover for Business Startups (ROBS). If you pay your initial franchise fee in cash or through the ROBS program, banks will typically count that towards your initial cash injection for an SBA loan.
When it comes to investing in a franchise, it’s important to remember the following rule of investment: there is no direct relationship between the amount you invest and the amount you can earn.
Available Lending Solutions to Explore
There are plenty of lending options available when considering investing in a franchise:
- 401K/IRA Rollover (Rollover for Business Startups – ROBS)
- Bank loan & credit union
- Home equity lines of credit
- Lines of credit on one’s stocks and/or bonds
- SBA loan
- Self-funded (leverage any of your assets to avoid any debt service)
- Family resources
- Unsecured loans
How Much Can I Afford to Finance?
The first step in determining how much you can afford to finance is to get pre-qualified. Most franchisors have minimum net worth and liquidity requirements, where liquidity includes cash, savings, stocks, and bonds. It’s important to note that a 401K/IRA Rollover is not necessarily considered liquid.
Franchisors and banks will both have requirements when it comes to financing.
Franchisors May Seek the Following:
- A minimum net worth requirement
- Information on your liquidity, which includes cash, savings, stocks, and bonds
- Note that a 401K/IRA Rollover is not necessarily considered liquid
- Home equity is not considered liquid to a bank because of the conversion process (time and documentation)
Banks May Seek the Following:
- Pre-qualifications (Request resource sheet from Harris)
- Good-to-excellent credit
- Liquidity for cash injection
- Liquidity for post-closing to support emergencies and personal needs
- Secondary income to support personal household expenses
- A business plan that shows the business will be able to pay the monthly loan note
Consider Every Factor When Investing in a Franchise
When determining how much cash you need to invest in a franchise, it’s essential to consider all the factors, including the franchise cost, available lending solutions, and the requirements of both franchisors and banks. By understanding these factors and preparing accordingly, you can make an informed decision about how much you can afford to invest in a franchise opportunity.
Remember that getting pre-qualified and knowing your financial standing is crucial to the process. Understanding the different lending solutions available to you and meeting the requirements of franchisors and banks will put you in a better position to successfully invest in a franchise that aligns with your financial situation and long-term goals.
The following webinar is a good resource for learning more about how you can finance your franchise or business (typically run monthly):
Explore Franchise and Business Funding Webinar
If you think having a franchise coach as you explore your options would be beneficial, don’t hesitate to reach out.