Restaurant Franchise Financing 101
Many people across the country — and from all demographic categories and walks of life — dream of being at the helm of their very own restaurant; either as an active part of the team, or as a more hands-off investor who stays in the background and delegates accordingly.
However, starting from ground zero with no clout with suppliers, no brand visibility, and no ready-to-roll supply chain infrastructure and marketing materials can be daunting — and certainly risky as well. That’s where restaurant franchising enters the picture!
If you’re interested in becoming a restaurant chain franchisee, then here are 5 rules of franchise financing that you need to know:
Franchise Financing Rule #1: Don’t Assume the Timeline
Some lenders promise “quick franchise financing” — but end up taking months to seal the deal. Don’t get trapped by marketing hype. Ensure that you know how long it’s going to take to go from “congratulations, you’re approved!” to “here’s your cash.”
Franchise Financing Rule #2: Don’t Underestimate How Much You’ll Need
There’s more to owning a franchise than paying the initial licensing fees. There’s overhead (rent, utilities, security, insurance, etc.), staffing costs, and more. Analyze your short, medium and long-term spending requirements, and align your franchise financing strategy accordingly.
Franchise Financing Rule #3: Explore All of Your Options
Just as banks aren’t the only — and often, not the best — options for getting a residential mortgage or personal loan, they shouldn’t be your only source for franchise financing. Explore the alternative lending marketplace, where you’ll find lenders willing to lean forward and support your franchise goals vs. make you jump through hoop after hoop.
Franchise Financing Rule #4: Beware of ROBS
Rollovers as Business Startups (ROBS) are often touted as smart options for franchise financing, since it lets borrowers pull funds from their registered retirement accounts (401(k), traditional IRA, etc.).
What’s the downside of this? Well, as warned by Franchise Times Magazine, the Internal Revenue Service is taking a much closer look at ROBS, and has declared them a “questionable” borrowing tactic that could result in “adverse tax consequences.” In other words: if you head down this road, you could be slapped with an IRS bill for tens or hundreds of thousands of dollars in back taxes and fines.
Plus, working with a ROBS consultant to navigate the complex maze isn’t cheap. You can expect to pay $5,000-$10,000 in fees by the time everything is done. That’s money that could be put back into your franchise vs. a consultant’s coffers.
Franchise Financing Rule #5: Crowdfunding? Don’t Count on It
While there are a few notable crowdfunding success stories, the chances of raising enough capital for purchasing a franchise are virtually non-existent.
Basically, aside from family and friends who may feel a sense of obligation to contribute to a campaign, there is no compelling reason for members of the general public to subsidize your (or anyone else’s) dream of restaurant franchise ownership. It’s nothing personal. It’s just reality.
With this being said, you can certainly launch a crowdfunding campaign and hope to catch lightning in a bottle; after all, anything is possible. But do yourself a profound service by focusing your attention, efforts and resources on obtaining franchise funding from a legitimate lending firm. You’ll be glad you did
To learn more about obtaining franchise financing to launch your restaurant — and empower your ownership dreams to take flight — contact the National Business Capital team today. We proudly support restaurant franchisees across the country and you can apply for a loan with our two minute application today!
If you’ve been turned down by banks before when trying to get restaurant franchise funding, you’re not alone! Because banks only approve 10-20% of the loan applications they receive, it can be difficult to get the funding to make your dreams come true. If you’re still looking for funding, you should first download our free eBook “How to Get Business Funding When Banks Say ‘No’” to learn why banks deny loans and which options you still have available.