Before Buying a Franchise: Follow These Tips to Secure Your Finances

You shouldn’t invest more than 15 percent of your own money in a start-up franchise, according to a recent Small Business Administration interview. Since most lenders want to see buyers come up with 20 to 25 percent of the total investment themselves, that leaves budding franchise owners to figure out how to come up with the capital and protect their own assets at the same time. Here’s how to get started.

Monitor Your Credit

Before you do anything else, pull your credit report and start monitoring it for changes in your credit score, inaccuracies in reporting and any outstanding debts tarnishing your report. Your score can directly impact your ability to secure a loan, as well as the interest rate the banks will offer. But it’s not just about your lenders. Franchisers also look at credit scores to ensure a potential franchise owner can manage their own finances. According to industry sources, many franchises want to see credit scores above 700 to even touch the paperwork.

Keep tabs on your finances and online identity through a service like LifeLock. Protect yourself from identity theft and get notifications on data breaches, financial account activity alerts, court records scanning and more. LifeLock can also help restore your credit and financial reputation before identity theft spirals out of control.

Establish an Emergency Fund

Face the financial risks of investing in a franchise head-on and work the initial fees, start-up costs, marketing bills and royalty fees into your business plan. Recognize that you may not turn a profit in the first year or two and will need an emergency fund to push you along through leaner times. Remember you may need cash from your emergency fund with both your business and personal living expenses in mind.

Leverage your Credit Cards

Traditional advice says to take out a bank loan or try to work with the Small Business Administration for funding options. While good advice, neither are guaranteed. Big banks approve less than 15 percent of small business loan applications. Look for business credit cards with an introductory zero percent interest rate. Many will also promote cash advance checks with zero percent interest for up to 12 months. Use business credit cards in combination with your personal finances and alternative funding to secure your franchise.

Downgrade Your Lifestyle

Take inventory of your assets, from your home to your car, and research their approximate value. Once you have a list in place, look to see how you can downgrade to a smaller home or trade in your new car for a used one. If you’re not in a position to sell your home, speak to your lender about lines of credit and pulling equity as an option to fund your franchise. Remember you can also downgrade your services like car and health insurance, Internet, and cable. Allocate part of your funds to your emergency fund and the rest towards your franchising fees to cover yourself during down times.

Tap Your 401k Plan

Raiding your retirement fund should generally be used as a last resort. But there are ways it could be done creatively and with a bigger safety net in place. The Wall Street Journal suggested setting up a C-corporation to own and operate your new franchise. From there, you could roll over your money from a self-directed account into the corporation. Speak to an attorney specializing in franchising and an accountant to discuss your options and what type of risk is involved.