Financing a Food Franchise

If you are contemplating the opportunity to start a food franchise, the first thing that you need to figure out is finances. It is hardly a case that an individual has enough cash to start a franchise without seeking external sources of finance. Though obtaining funds from external sources may prove to be a challenging task, it is not impossible.

As a matter of fact, financial institutions are more inclined to provide loans to the franchise than a new start-up due to a comparatively lesser amount of risk attached to it. Yet, there are certain factors that you must consider before choosing a way to finance your franchise.

Here are six effective ways to finance your new food franchises.

1. Friends and Family

While seeking finances from family and friends can be a daunting prospect for many people, mainly because they are concerned that their relationships might get hampered. However, if done correctly, pursuing finances from your loved ones can be an excellent way to finance your food franchises UK, and that too while preserving your relationships.

The key point here to keep in mind is that you should keep things professional. Draw a proper strategy, understand your requirements, and present them your plan. Moreover, you should be prepared for rejection and effectively manage your expectations. You might use the help of a lawyer to draw up the documents to ensure there is no vagueness in the agreement as disputes will not only have legal ramifications but may also hamper your precious relationships.

The key benefit of obtaining finances from family and friends is that they are more patient than conventional lenders and do not ask for collateral or prerequisites to provide you the money. However, you should not take them for granted and keep them informed about your business progress to maintain harmonious personal and business relationship with them.

2. Bank Loans

Though it’s been more than a decade, the aftermath of the 2008 recession is still affecting those who opt to pursue financing from banks. Unlike how things were previously, young entrepreneurs face severe difficulties and challenges to secure a loan from a bank. This case is especially true for small businesses and franchisors, especially those operating in the food franchise industry, possibly due to its unpredictable and operation-intrusive nature.

For instance, food franchises UK may require high capital investment and need to burn a substantial amount of money. However, low cost franchises such as coffee franchises may be able to secure finances much easily. It is due to lower capital requirements. Regardless, you will require good financial history, excellent credit rating and a certain amount of liquid capital in order to get a loan from the bank. In some cases, particularly when the required amount is high, you might also be required to provide a collateral or guarantees to secure the funding,

3. Home equity

A second mortgage or home equity line of credit (HELOC) can also be leveraged to secure financing for your food franchises UK. Using a HELOC, you are allowed to borrow against the available equity in your house. Thus, your home is utilized as collateral for the LOC. After the repayment of your outstanding balance, the available amount of credit is restored, similar to a credit card.

However, there is a big personal risk associated with it. As you are using HELOC to finance your franchise, you will be using your home as security. Thus if you are unable to keep up with the loan payments and default, the bank will have the right to take possession of your home and sell it to recover the money that they have to lend you. Though if you have sufficient equity in your home, HELOC is a relatively easier way to secure the amount of financing that you need for your franchise.

4. Retirement Savings

It may sound precarious and risky. But, it is not uncommon for people to use their retirement savings to finance their food franchises UK. These retirement savings may include but are not limited to, IRA, stocks and personal savings accounts.

There are many advantages of opting for this method. For instance, it does not depend on your credit score. This typically requires a month to get access to the funds. Moreover, it is penalty-free, tax-deferred financing. This allows you to build your equity at a much faster rate. Because there is no interest element involved in the financing.

That being said, there are some downsides of this option as well. You will be required to go through a complex administrative process, thus requiring services of a lawyer. More importantly, you need to understand that risking your retirement savings can potentially put your future in jeopardy. It can be in case your food franchises UK are not successful.

Thus, unless you have sufficient extra funds in your retirement plan or stream of income(s) such as rent from properties, etc., to ensure that you will have certain amount of money every month to pay for your expenses after the retirement, you may be better off looking for other financing options or start off with van based franchises which require lesser amount of capital.

5. Veterans Loan

There are government institutions that offer financing opportunities to qualified veterans in order to help them open a franchise. The qualified individual will be able to secure a loan to open their franchise. They can make a transition from their military life to citizen life. Moreover, this option is not only limited to veterans. But this also extends to facilitate their spouses and other surviving members of the family. Are you happen to be a veteran or qualifying member for a loan? You can use this facility to start your food franchises UK.

Final Words

These are only a few effective ways to secure external finance to inject in your new franchise. There are several other options which you can explore depending upon your contacts, financial position, and ability to negotiate.

Find the work-life balance you always wanted. Get in touch with Franchise for more information on how to become a franchisee.

By Punit