Lots of people wish, want, hope to own a business of their own, but few of them have actually looked into the details of if they CAN afford to own a business.
Here’s a simple … very simple … “rule of thumb,” so to speak, to give you an idea about whether or not you can afford to invest in a business.
The basic, “bottom line,” financial requirement for being a viable candidate for franchise business ownership via a Small Business Administration-guaranteed loan (which is the most common funding method) are the following:
At least $50,000 in liquid, un-borrowed funds “Liquid funds” means cash, bonds, stocks, 401(k) and/or non-Roth IRA funds … thus, “un-borrowed”
Because the funds must be “un-borrowed,” you can’t use a home equity line of credit, a loan from someone, etc.
In addition to the $50,000 un-borrowed liquid funds, you must also have a net worth (i.e., everything you own and all the funds you have minus everything you owe) of at least $300,000
Now, the requirements listed above won’t qualify you every type of franchise, but rather mostly service-based franchises that you will need to work yourself … at least until you grow your business to the point where you can hire employees and possibly even a general manager so you can transition to working “on” rather than “in” your business.
In addition to the requirements listed above, you’d also need enough resources to “cover your monthly nut,” so to speak. In other words, to cover your monthly cost of living (rent/mortgage, car payment(s), insurance, utilities, clothing, and food, etc., along with your payments on your SBA-guaranteed loan).
Usually, that means you most likely will need a working spouse or significant other who has enough income to cover your monthly living expenses and SBA loan payments as you grow your business.
If you desire to keep your current job and open what’s called a “semi-absentee, manager-run” franchise business, you’ll need a higher level of resources.
The positive of investing in a semi-absentee franchise is you can keep your current job and the income you are receiving to cover your monthly expenses and SBA loan payments as you grow your business … and most semi-absentee franchise owners grow their businesses into multiple units over time while they continue with their full-time employment.
Most (but certainly not all) semi-absentee franchise businesses are retail-based businesses. That means they have a physical “store” usually located in a shopping center, often referred to as a strip center.
Building out, furnishing and stocking your semi-absentee ownership franchise unit usually has a “total project cost” of between $200,000 to $500,000 or more. To qualify for an SBA-guaranteed loan for such a project, you’ll need around 20% of the total project cost (the full cost of getting a business open and operating) in, again, un-borrowed funds. This percentage is called the “owner’s cash injection.”
Twenty percent of $200,000 is $40,000 and 20% of $500,000 is $100,000 and you’ll also need to document regular, reliable income sufficient to cover your monthly living expenses and your SBA loan payments as you grow your business.
Many franchise owners leverage their 401(k) funds to cover the owner’s cash injection via a Rollover for Busines Startups (ROBS). You can use your 401(k) funds without an early withdrawal penalty and without paying taxes on the funds you use. Another benefit of the ROBS program is that many franchisees can finance the entire total project cost via their 401(k) funds with the ROBS program resulting in the absence of needing to finance their business investments.
So, is it possible for you to finance a franchise business investment? The examples above are simply general guidelines, so you should talk to an experienced franchise financing company to learn the full range of opportunities you have, based on your particular financial situation and specific goals, before you count yourself either “in” or “out.”
Having been in franchising for 26 years now, I can refer you to several well-established companies.
Let’s talk!
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