Franchise Article

Using Your Resources to Finance Your Franchise

As you begin looking for ways to finance your franchise, be careful not to overlook one of your most important possibilities: your own resources.

Friends & Family Contributions

While your own cash flow and assets are important in the franchise financing process, you should also consider looking to those around you who would care about helping you achieve your dreams.

Before you begin asking for money, however, you need to understand the role these willing contributors are going to play in your restaurant. You can't simply borrow money from your family and friends in order to meet your financial requirements with the franchisor. It doesn't work that way. The franchisor has to make sure that the franchisee - in this case, you - has the financial ability to get this franchise off the ground. If you're borrowing money from day one, then you may not be the best choice, at least in the franchisor's eyes.

Instead, any of your friends and family members who give you money become investors. That means they get a say-so in how you run your business. If that idea makes alarms go off in your mind, then you may want to avoid asking for money from those people you care about.

Incidentally, if you do decide invite your friends and family members to become investors then make sure to get all of your agreements in writing, including the role they will play in the business and how they will recoup their investment.

Home Equity Loans

We've all heard of using home equity loans to consolidate debt or to do home repairs, but to purchase a franchise? It's a more common practice than you might imagine.

Your home's equity is determined by subtracting the remaining mortgage balance from your home's value. With a home equity loan, you are tapping into that remaining value in order to extend your available credit. There are a number of advantages to home equity loans. For one, the interest rates are considerably lower than for other types of loans. Another reason is that all of the interest you pay on a home equity loan of up to $100,000 is tax deductible.

Another reason why you might choose a home equity loan to finance your franchise is that it's going to be easier to get approved.

However, you should be aware that if you use that home equity now to finance your franchise's start-up, you might end up in trouble down the road when you're in need of additional cash. If you've already drained your home's equity in additional loans, then you won't be able to take out a business or home equity loan for a long time. To protect yourself, you may want to only borrow on 75% or less of your home's equity. That way, you leave behind enough equity to come in handy in the future.

If your dream is to be your own boss and to open a franchise, then there are resources around you that can assist you in achieving that dream. You just have to weigh the pros and cons of using your home equity and/or bringing in your family as investors before you make those decisions.