Do I Qualify?
How to finance a Planet Smoothie franchise business
“How do I finance a Planet Smoothie franchise business if I do not have the needed liquid capital to launch the business?” That’s a question that many franchise candidates ask — especially if this is their first time owning a franchised business. We advise prospective franchisees to consult with lenders and qualified professional advisors. To give you an idea of where you might start, here’s a look at the most common forms of financing:
1. Home equity loans
If you have owned your home for many years, there’s a good chance you can obtain a home equity loan (HELOC) in order to finance your new business.
Advantages: They usually have a very low interest rate; they are highly flexible and sometimes have no specific repayment schedule; and they don’t require a lot of documentation, such as a formal business plan or an accounting of how the funds will be used, which provides even more flexibility for your business.
Things you should know: You’ll need to show that you have enough income to repay the loan through your existing sources of income — your projected earnings as a franchise owner won’t count when the bank calculates your ability to repay. Also, in most markets, you can borrow up to 80% of the loan-to-value cost of your home. To calculate how much you can likely borrow, multiply the value of your home by 80%, then deduct the remaining mortgage debt from the total. For instance, here’s what the calculation would look like if your house is valued at $400,000 and your remaining mortgage debt is $100,000: $400,000 x 0.8 = $320,000. $320,000 – $100,000 = $220,000. In most markets, you should be able to obtain a home equity loan of $220,000. A real estate appraisal will be required to establish your home’s value.
2. Leverage retirement funds tax-free and penalty-free
If you have a 401(k) or IRA, it can be converted into a self-directed IRA that you can use to fund your business. This financing option became extremely popular during the recession, when depressed real estate prices eliminated home equity loans as an option for many franchise buyers.
Advantages: Once you set up a self-directed IRA, you can tap into your retirement funds without paying penalties. Since it’s your money, not the bank’s, you don’t have to worry about a long loan approval process, and as your business succeeds, you make payments back into your retirement account without having to pay interest to a bank. This option also allows you to conserve cash in your bank accounts so that it is available for starting and growing your business.
Things you should know: Your business becomes your retirement plan, which brings risks and rewards. You should be confident that you can beat the stock market by building the value of your business, as well as by avoiding interest payments on a loan.
3. SBA Loans
SBA lending has made a strong comeback as the economy has improved, and it is much easier to obtain an SBA loan than it was just a few years ago. These are government-backed loans, which eliminates most of the risk for banks.
Advantages: You can finance a percentage of the cost of your business, which allows you to conserve cash; the interest rates tend to be fairly low; there is no prepayment penalty; and you can obtain better loan terms once you have a proven track record.
Things you should know: It can take three months or more to obtain an SBA loan, and by the time the documentation process is over, they’ll probably know the color of your toothbrush. The loan also requires 100% collateral. If most of your collateral comes from home equity, you may want to consider a home equity loan instead.
4. Friends and family
You may have friends or relatives who are willing to invest in your success.
Advantages: They know you, they are typically flexible on repayment terms and they may have expertise that they can offer your business. They may not require collateral.
Things you should know: If the business doesn’t meet expectations, it may strain your relationships. Family and friends may also seek equity in exchange for your investment, which would create a partnership arrangement.
Partnerships can allow two or more people to combine their resources to purchase a Planet Smoothie. If partners complement one another’s skill sets and add value to the business, it can be a great arrangement.
Advantages: You can split management and leadership duties, which gives you greater capacity and flexibility. Since you have multiple people to oversee operations and marketing, you may be able to grow faster.
Things you should know: Partners must have clear guidelines for who handles what and how profits are divided. In addition, to get the most out of your partnership and avoid disputes, clear communication and a shared commitment to the business are essential.
Let us help you examine your options to finance the smoothie franchise cost
Planet Smoothie’s veteran executive team has helped countless people start their own businesses, and we are adept at helping people identify promising sources of financing. If you’re not sure which way to go — or if you are even qualified — send us a message using the form below. We’d love to help you realize your dream of owning a business!