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Franchise Finance: How Much Money Does It Take To Start A Franchise?

Posted by Nat Truitt on Oct 11, 2018 12:13:00 PM
Nat Truitt

Most franchise companies require a minimum level of liquid capital to fund a franchise unit. They know that businesses often fail because they are undercapitalized, and they want to be sure franchisees are set up for success.

A number of costs beyond the initial fee need to be considered when you're investing and if you can afford a franchise. There will be legal fees, equipment and inventory to purchase, rent, and royalty fees, for example. Keep in mind, too, that there is a ramp-up period with any business. You need enough money to cover your expenses during this time when more money will be going out than what is coming in.

Podcast Episode: What Are My Funding Options?Meanwhile, the ordinary expenses of life continue, and you still need to support your family. You will need working capital beyond the start-up costs to keep yourself afloat until you’ve passed the breakeven point, at which time you will be able to start paying yourself.

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Your available capital...

...will to some extent dictate your choices in franchising. Candidates sometimes expect to borrow all or most of the required investment, but the system doesn't work that way. Financing is available, but don't plan on relying on loans to meet the bulk of your investment requirement.

From a financial perspective, franchisors are really looking for two things as they evaluate you as a candidate. First, they want you to have a certain level of liquid capital—cash on hand or other assets you can quickly and easily turn into cash.

Aside from money in the bank, examples could include an equity line of credit on your home, stocks and bonds, or even leveraging your retirement accounts. A good general guideline is that you’ll need a minimum of $50,000 to $60,000 in liquid capital for a service-based business, and anywhere from $75,000 to $100,000 for a facility-based business.

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The second financial criterion...

...a franchise company will consider is your net worth. If you seek financing, you’ll need to back it up with something. Net worth is determined by the value of your assets less your liabilities. For example, if you have assets of $750,000 and you have $400,000 in liabilities, then your net worth would be $350,000.

There are companies that specialize in helping entrepreneurs leverage their available capital and raise capital if needed. Many options are available to secure financing depending on your particular circumstances.

No matter how you choose to finance your new business, though, the bottom line is that lacking the necessary capital to successfully launch a new business, franchise or otherwise, is a nonstarter.

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Topics: Funding, Franchise