For those who have asked themselves the tough questions and determined that owning a franchise is right for them, obtaining the funding required to pay the startup costs of franchise ownership is a challenge, sometimes an overwhelming one.
Initial investments vary widely, but the figures range from under $10,000 to well into six figures, with the typical cost of many franchises falling in the $200,000 range. Most franchise buyers don’t have access to the liquid assests – i.e., cash – to fully fund their purchase. Where to turn? There are conventional bank loans, of course, as well as funding from the U.S. Small Business Administration.
The Great Recession that began in 2008 brought a new franchise funding concept into vogue. When conventional financing dried up and prying capital out of banks and other lenders became nearly impossible, the franchising world turned to an asset held by the majority of prospective franchisees: retirement funds kept in 401(k) accounts, IRAs, and other tax-sheltered retirement vehicles.
The details of getting funding from a retirement account for the purpose of buying a franchise unit are, of course, best taken up with your accountant, financial advisor, and attorney. Here are the basics of how it works:
- The franchisee sets up a corporation which will own the franchise.
- This corporation establishes a qualified retirement plan.
- The franchisee rolls funds over, tax-deferred and penalty-free, from his personal retirement account to the corporation’s retirement plan.
- As the holder of funds in the new retirement plan, the franchisee directs some or all of those funds to the purchase of stock in the new corporation – which are used for startup costs or any other approved business expense.
Rhino7 Franchise Development Corporation works closely with a number of financing companies to assist new franchisees in identifying funding solutions. Three of these companies are Benetrends, FranFund, and Guidant Financial. With the help of a seasoned, expert professional, newcomers to franchising can find a way to realize their business dreams.
