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Home-Based Franchises
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Article 2: Tap Financing Sources
Buying a franchise isn’t cheap. The initial franchise fee, equipment and startup costs can be $100,000 or more, even for a home-based franchise.
Some franchisees have the money in savings or from a corporate buyout. But here are three potential sources of financial help about which many buyers aren’t aware.
Retirement funds. The federal Employee Retirement Income Security Act of 1974 has a provision that allows the owner of a 401(k) account, individual retirement account or tax shelter annuity to start or buy a business without income taxes or penalties for withdrawing the money before age 59½.
The franchise industry has been aggressively promoting this method, but franchise buyers should use caution and not tap all of their retirement funds.
The buyer creates a C corporation for the new business. The corporation creates a self-directed retirement plan and trust account at a bank. Then the buyer rolls over money from a pension or IRA into the new plan. The buyer, as trustee for the plan, invests the money in the franchise. Government-guaranteed loan. Thousands of private lenders nationwide make business loans that are guaranteed by the U.S. Small Business Administration. Relatively few of these loans go to startups, but of those that do, the lion’s share go to franchises.
Lenders are more comfortable with a franchise whose concept has been proven successful. Many don’t object to home-based franchises as long as the buyer has a business plan explaining how he will be successful in the local community. The franchisor. Many companies that sell franchises help their buyers get financing to start and grow their individual businesses. They may have deals with third-party lenders for interest loans or equipment leases.
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