Borrower Beware: Here’s Some of the Worst Advice You’ll Find on Franchise Financing

Last Updated on October 27, 2017

If you’re a regular visitor to the National Business Capital blog, then you know we like to focus on solutions here. However, every now and then we find it more helpful to warn business owners about what they shouldn’t do instead of suggest what they should do. And that brings us to the sometimes murky world of franchise financing!

So what’s the problem with franchise financing? Essentially, nothing. It’s smart, viable and for many business owners it’s the only way they can purchase or expand a franchise. However, the issue is how some business owners are advised to get franchise funding. Keep reading to discover some of the worst advice on how to secure franchise financing and how you avoid these situations:

franchise funding

Use Your 401K

This isn’t about putting your financial future at risk, since that part is obvious — and if you decide it’s a risk worth taking, then so be it. After all, it’s your money, you earned it, and you’re in charge of when and how it’s spent.

Rather, the problem with using your retirement savings for franchise financing, is that it’s not as easy as you’ve probably been led to believe. For example, to avoid taking a major tax hit you’ll need to incorporate a new business, and open a 401(k) plan in it, before rolling over the funds.

In addition to being a complex and time-consuming process, you may find yourself on the IRS’s audit dartboard. While Uncle Sam doesn’t outright view this scheme as illegal tax evasion or abusive tax avoidance, they have referred to it as “questionable,” and enforce very strict guidelines.  This means you’ll definitely need to pay for an accountant to steer you through using a 401(k) for franchise financing and that’s not cheap.

Borrow from friends and family

One of the fastest ways to lose friends and alienate family members is by relying on them as a viable source of franchise funding. There are so many red flags here that it’s difficult to know where to begin.

We’ll start with this: it can take well over a year before a franchise — even one with a well-known brand and strong demand — breaks even, and then even longer before it turns a profit. However, friends and family members often don’t understand this timeline, and can grow impatient — and anxious — if they don’t get their money back in weeks or months.

Next up is the “back seat franchise owner.” It’s one thing to listen to your in-laws drone on at Thanksgiving dinner about how you need to run a business when he or she hasn’t lent you a cent. But once they are part of your funding team, then things tend to take on a more serious — and less welcome — tone. Instead of providing suggestions, friends and relatives can start giving orders; or at least, expecting you to take time out of your ridiculously busy schedule to listen to their lecture on all of the things you’re doing wrong.  

Of course, there’s the possibility that one of the funders will have an urgent financial need (or maybe just wants to go on a Disney cruise). They aren’t going to max out their credit cards, draw down a line of credit or home equity loan, or tap into their savings. They’re going to call you and ask for their money back.

Apply for an SBA Loan

What’s wrong with an SBA loan for franchise funding? Technically, nothing. If you can get one, SBA loans often have borrower-friendly terms, relatively low interest rates, and the payback durations can be several years — or even decades.

But the operative phrase in that paragraph is “if you can get one” — because the majority of borrowers can’t. The SBA has a limited amount of annual funding, and due to overwhelming demand the pool typically dries up by September of each year.

What’s more, if you thought that renewing your driver’s license at the DMV or sending a package at the post office during the Christmas crush was tedious and time consuming, they’re a walk in the park compared to applying for an SBA loan. Expect to spend anywhere from 50-100 hours on a large, complex application package that must include multiple documents. As for the timeline, at least a dozen different “loan officers” will be involved as your application snakes its way through the process. You’ll be lucky to hear back within six months whether you’re getting franchise funding, but don’t be surprised if it takes closer to a year.

At National Business Capital, we can help you streamline this SBA loan process to a certain extent, but you really need perfect credit and exemplary business history to qualify.

The Good News (Finally!)

If the above has dialed down your franchise-owning enthusiasm, while at the same time boosted your blood pressure: we finally have some good news. At National Business Capital, we offer a full range of franchise financing solutions that ensure that you don’t have to use your 401(k) or ask family members for money. What’s more, if you have impaired or bad credit, we approve 90% of applications we receive and we’ll review any application within 24 hours. You know that when it comes to franchise funding, time is of the essence: and we know it, too!

Learn More

Franchise financing is just one of the profitable opportunities you could miss out on without business funding. If you’re looking for more way to expand your business and grow your revenue, check out our free eBook “7 Profitable Opportunities that You Could Miss Without More Business Funding” today:

National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.

We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!


About the Author, Megan Capobianco

Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.

Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital & Services and the author. Do no rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.