A franchise’s liquid capital is defined as the amount of funds a franchisee needs to have at hand in order to efficiently launch the franchise business. Please note that this doesn’t just represent the sum of funding you will pay the corporate entity (known as the Franchise Fee).
The liquid capital typically constitutes the franchise fee, your startup and coaching expenditures, whatever anticipated costs for real estate, as well as some portion for business expenses during the startup period before your business becomes financially viable.
Most franchisors expect new franchisees to source some amount of financing on top of their own capital investment. It is imperative that you reach out to your potential franchisor about what your liquid capital investment is expected to cover.
As long as your net worth remains within the scope proposed by the franchise you want to buy, the next major element is determining your liquid capital. This is the fund you can deliver in cash if necessary. Your liquid capital consists of cash in bank deposits and readily available stock investments.
Based on the scale of the obligations you end up making with your franchisor—for example, a multiple territory design plan or an outstandingly huge and pricey facility—you may require significantly more cash at hand.
Table of Content
- Is it Possible to Use a Loan as Liquid Capital for a Franchise?
- Franchise startup loans
- SBA franchise loans
- Franchise bank loans
- Online loans for existing franchises
- Franchise loans for people with bad credit
- Franchisor financing
- Rollovers as Business Startups, or ROBS
- Friends and family
- Requirements to Get Liquid Capital for a Franchise
- Determine the kind of financing you require
- Examine the credentials of your company
- Investigate and contrast lenders
- Send your request
Is it Possible to Use a Loan as Liquid Capital for a Franchise?
Yes. A loan can be used as liquid capital for a franchise; however, borrowing funds to meet liquid capital demands is not advised. The additional cost of borrowing places a strain on both your prospective business cash flow statement and on you as a person.
Aside from that, you have to be capable of living if the investment is totally lost. If you already have strong credit card balances, an excessively high debt-to-income ratio, or periodical commitments all of which are putting pressure on your financial affairs, you should consider consolidating your debt.
Once you’ve sorted out your financial affairs, only then should you consider entrepreneurship. If you do not have enough liquid assets in cash reserves to meet the financial criterion for your preferred franchise, you may have collapsible resources that can help; for instance, home equity.
Note that if your home is valued more than you own on your mortgage, it is very possible to access that value via a line of credit, thus converting it to a liquid asset.
How Do You Get Liquid Capital for a Franchise?
To be honest, there are numerous funding options currently offered when seeking liquid capital for a franchise, such as banks, SBA lenders, online lenders, franchisors, and even friends and family.
These funds can be used to acquire a franchise, acquire personnel and materials, reconstruct your flagship store, and much more. Selections of the best franchise financing options are listed below, along with information on how to apply for funding.
Franchise startup loans
This source of finance enables you to get money depending on the value of your investments without needing to sell them. It is indeed a smart way to capitalize on one’s long-term holdings, and the authorization and allocation procedure usually takes less than 10 days from beginning to end.
Franchises can get business lines of credit from companies like Fundbox. The above credit lines are obtainable in sums up to $150,000 and may be utilized for capital investments, salaries, and benefits, the purchase of supplies or materials, among other things.
SBA franchise loans
Participating lending institutions, typically banks and credit unions, offer SBA loans that are moderately assured by the US Small Business Administration. Both SBA 7(a) loans and SBA CDC/504 loans are used to finance franchises. SBA 7(a) loans are known to have reasonable rates and affordable repayment capacity, with lines of credit of up to $5 million.
Also, note that SBA 7(a) loans can be used for a vast array of objectives by franchisees. Your franchise will nonetheless be expected to be identified in the SBA Franchise Directory to be eligible to apply.
Franchise bank loans
Banks and credit unions can provide a broad range of franchise financing alternatives. The above funds may have the most affordable interest rates and repayment terms, but they will come with strict eligibility requirements. TAB Bank, for example, provides enterprise term loans up to $200,000 with terms ranging from 12 to 60 months.
The above loans, which can occasionally bankroll quicker than an SBA loan, might be a viable solution for existing franchises with stellar credit.
Online loans for existing franchises
If you don’t meet the criteria for a financial institution or SBA loan, or if you need funding quickly, note that online loans provide a viable solution for financing your franchise. Online lending institutions are known to provide more reasonable criteria than conventional lenders and thus can bankroll requests in a matter of days.
Funding Circle, for instance, provides up to $500,000 in enterprise credit facilities with repayment plans of one to seven years. To meet the criteria, you must have at least two years of commercial experience and a credit rating of 660. If you are accepted, you could receive franchise financial support in as little as three days.
Franchise loans for people with bad credit
Franchise financing from bad credit loan companies like OnDeck may be available to you. This company, for example, only requires a credit score of 625. OnDeck offers appropriate lines of credit of up to $250,000 that are ideal for one-time initiatives like promotional activities, asset acquisition, corporate refurbishments, or other comparable franchise expenditures.
Several franchisors offer various types of franchise funding. Franchisors might very well provide reduced or voided fees, direct funds, or collaborate with third-party lending institutions to assist franchisees in obtaining loans. For instance, the UPS Store collaborates with Guidant Financial to support new franchisees obtain funds.
The firm also exempts the franchise fee for eligible service members and gives a price break to first-time minority-owned enterprises.
Rollovers as Business Startups, or ROBS
Several franchisees utilize a ROBS, which usually includes withdrawing funds from your 401(k) or other pension plans to engage in your business venture, typically with the assistance of a counsel or ROBS provider. ROBS are volatile and might even incur significant service charges; as such, consider deeply before pursuing this alternative.
Friends and family
If you possess a family member or acquaintance that is willing to contribute to your business, you could request a loan in order to get your franchise started. When somebody is interested in giving you money, you should create a loan document outlining the specifics and conditions of the line of credit in order to keep your good rapport independent from your business deal.
Requirements to Get Liquid Capital for a Franchise
As you become ready to search for the ideal franchise credit, ensure you satisfy the requirements and possess all the appropriate paperwork. Some of the requirements include:
- Application for an SBA loan (Form 1919)
- A notarized franchise agreement copy
- Personal history statement
- Personal and commercial financial statements
- Business License
- Past credit records
- Returns on Taxes
- A copy of the business lease
Steps to Obtain Liquid Capital for a Franchise
You could qualify for a line of credit for your franchise by doing the following:
Determine the kind of financing you require
You must determine what sort of business loan you require, how much capital you require, and the amount of debt you can bear. If you’re just getting started with your brand, consider franchisor financial support or online loans. Some franchises will most possibly have several funding opportunities, such as bank or SBA loans.
Examine the credentials of your company
Many lending institutions would assess your loan request based on your personal credit score, duration in business, and total income.
They might even take into consideration your cash flow, financial statements, accessible collateral, and franchise label. You should go through your credit reviews and financial declarations in advance to understand where your company stands.
Investigate and contrast lenders
After you’ve determined your funding requirements, you can narrow down your lender search. If you already have perfect credit and a secure economic background but require quick financial support, you can look into online lenders such as Funding Circle or Credibility Capital. You should conduct studies and evaluate numerous lending institutions to discover the best for your company.
Send your request
The lending institution and sort of funding you select will have a significant impact on your franchise credit proposal. With document-heavy applications, bank and SBA lending institutions will most probably have slower processing times.
How to Determine the Networth and Liquid Capital Requirements of a Franchise
You could calculate either of these figures by totaling the whole of your assets and liabilities and identifying the exact assets that are liquid and those that are illiquid. Liquid assets are cash or assets that are easily, quickly, and effectively transformed into money in not more than 30 days; while illiquid assets are assets that you don’t have easy access to or those whose worth is unclear.
You will be able to ascertain your present financial situation with this method, which would also ensure that you can correctly determine how much you can reasonably spend on a franchise.