A smarter franchise funding plan accounts for more than the number on the initial investment line.
When prospective franchise owners ask how much money they need to get started, the most obvious place to look is the brand’s estimated initial investment. It is an important number, but it is not the whole funding picture.
Opening a franchise requires capital for the costs of getting the business ready to operate, but a sound plan also considers what happens after opening day. Payroll still has to be met. Marketing continues. Inventory may need to be replenished. Revenue may take time to build. And an unexpected delay or expense can quickly change the amount of cash a new owner needs available.
That is why franchise financing should begin with a different question: What will it take to fund the business through launch and into its early operating period? At Benetrends, we help prospective business owners look at the full capital need and evaluate funding strategies designed around their individual circumstances.
The Franchise Fee Is Only One Piece of the Investment
The franchise fee is often one of the first numbers a buyer encounters, but the cost of launching a franchise can extend well beyond that fee. Depending on the concept, a new owner may also need to account for real estate, construction or leasehold improvements, equipment, technology, signage, inventory, insurance, professional services, training, travel, pre-opening payroll and required launch marketing.
That is what makes the Franchise Disclosure Document (FDD) such an important planning tool. Rather than focusing on a single number, prospective owners should review the investment information and related requirements in the FDD carefully and use them as the starting point for a broader financial plan.
The goal is not simply to determine whether you can afford to buy the franchise. It is to understand what the business may require before opening, at opening and during the period when it is working toward consistent cash flow.
Build Working Capital Into the Plan From the Beginning
A franchise can be fully built, staffed and ready for customers and still need time to develop predictable revenue. Working capital helps give the business room to operate during that ramp-up period.
The appropriate amount will vary by business model and individual circumstances. A location-based concept with a large staff may have very different early cash needs than a home-based service business. Seasonality, hiring timelines, local marketing, inventory cycles and construction schedules can also affect the amount of liquidity an owner may want available.
This is where funding only to the minimum can become a problem. Starting with less debt is not automatically the same thing as starting with a stronger balance sheet. If putting more cash into the initial investment leaves an owner with little liquidity for the first several months, the business may have fewer options when something does not go exactly according to plan.
Think in Terms of a Capital Stack, Not Just a Loan
There is no single franchise financing strategy that is right for every buyer. The better approach is to understand the available sources of capital and determine how they can work together.
SBA 7(a) financing. The U.S. Small Business Administration’s 7(a) program is its primary business loan program. Eligible 7(a) loans can support uses that include starting or acquiring a business, working capital, equipment, furniture and fixtures, leasehold improvements and other qualifying business needs. The loan is made by a participating lender, with terms negotiated between the borrower and lender subject to SBA requirements. Learn more about SBA 7(a) loans.
ROBS funding. A Rollover for Business Startups (ROBS) arrangement can allow an eligible entrepreneur to use qualifying retirement funds to invest in a new business without treating the transaction as an early retirement-plan distribution. Because ROBS is not a loan, the capital itself does not create a monthly loan payment. ROBS arrangements are complex and must be established and administered correctly, so they should be evaluated with experienced professionals. Explore ROBS funding from Benetrends.
Personal capital. Cash savings or other personal resources may be part of the funding strategy. The important question is not simply how much personal capital is available, but how much should be committed while still preserving appropriate liquidity for personal and business needs.
A combination of funding sources. For some buyers, the answer is not one funding method at all. For example, a qualified owner may use ROBS capital alongside an SBA loan. A blended strategy can change the amount borrowed, the owner’s equity contribution and the cash that remains available, which is why the structure should be considered as a whole rather than one product at a time.
Five Questions to Answer Before You Finalize Franchise Funding
1. What does the FDD say the initial investment includes? Identify which costs are included in the stated range and which expenses may fall outside it.
2. What could change before opening day? Consider buildout timing, equipment needs, hiring, permitting, training, travel and other variables that may affect the final startup cost.
3. How much working capital does the business plan assume? Look beyond the opening date and consider the cash needed while the business builds revenue.
4. How much liquidity will remain after the investment? A funding plan should consider what is left available, not only what is being spent.
5. Which funding structure fits the owner and the business? Debt, retirement-based funding and personal capital affect cash flow and liquidity differently. The right mix depends on the individual situation.
The Goal Is to Fund the Business, Not Just the Opening
Franchise buyers naturally focus on getting to opening day. A stronger financing strategy looks farther ahead.
The amount of money needed to start a franchise is not simply the franchise fee, the minimum investment or even the amount required to complete the buildout. It is the capital required to launch the business with a realistic plan for its early operating needs while maintaining enough flexibility to respond when assumptions change.
That is also why funding conversations are most useful when they happen early. Understanding the available options before capital is committed can make it easier to compare structures, identify potential gaps and build a plan around the full investment.
Benetrends Financial works with entrepreneurs and franchise owners to evaluate funding strategies including ROBS, SBA financing and other business funding solutions. Connect with Benetrends to start building a funding strategy around your business, your resources and your goals.
Editorial note: Funding eligibility, terms and availability vary by applicant, lender, transaction and program requirements. This article is for general informational purposes and is not legal, tax or investment advice.
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Primary topic/search phrase: how much money do you need to start a franchise
Related terms: franchise financing; franchise startup costs; franchise working capital; SBA franchise loan; ROBS funding
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• U.S. Small Business Administration — 7(a) Loans: SBA 7(a) loan program
• Benetrends Financial — ROBS and SBA funding pages linked within the article.
