Are you interested in learning how to finance your franchise? If so, you’re not alone.
At Del Taco, some of the most common questions we receive from potential franchisees are about their financing options.
In this article, we’ll highlight seven proven methods to finance your franchise and how to pick the best option for your unique situation.
1) SBA Loans
Small business loans are partially guaranteed by the government through the Small Business Administration (SBA) to remove some of the risk for the financial institution who issues the loan.
The SBA works with a network of approved financial organizations who frequently work with small businesses. Plus, their Lender Match tool will help you find a lender in four easy steps:
- Describe Your Needs: Answer a few questions about your business is as little as five minutes.
- Get Matched in Two Days: Receive an email with contact information of lenders who express interest in your loan.
- Talk to Lenders: Compare rates, terms, fees, and more.
- Apply for a Loan: Submit loan applications and paperwork. You’re well on your way to securing a business loan.
Financial institutions can offer better small business credit terms because the SBA partially guarantees the loan for your franchise.
When you have the SBA as your lending partner, it will reduce financial risk and enable easier access to capital for your franchising needs.
2) Franchisor Financing
One of the most straightforward ways to finance your franchise is by dealing with the franchisor you’re interested in doing business with.
Some brands will offer special financing options that are designed to meet the specific financial requirements for their brand.
At Del Taco, we don’t offer financing directly to franchisees. However, we do provide a multi-unit development incentive to help you get started.
Under the Development Incentive Program for qualified buyers, if you sign a Development Agreement for a minimum of three restaurants to be developed and opened under the development schedule during the time frames specified in the Development Agreement, and certain other requirements are met, you may be eligible for the following incentive:
Your royalty (which is currently 5% of net sales) will be reduced to:
- Year 1: 1% Royalty Fee
- Year 2: 2% Royalty Fee
- Year 3: 3% Royalty Fee
- Year 4: 4% Royalty Fee
- Thereafter: 5% Royalty Fee
This incentive is designed to help your restaurant franchise business during the formative years of development in a new market.
More details about this program can be found in our Franchise Disclosure Document. Need a copy of our latest FDD? Please contact our sales and support team.
3) Commercial Bank Loans
If an SBA loan is not a good fit, franchisees can apply for a commercial loan with the bank of their choice.
Most banks will require you to have a good credit rating in order to qualify for these types of loans.
Also, you may be asked to prepare a detailed business plan before they allow you to move forward.
4) 401k Rollovers
Another option you may want to consider is funding your franchise with money from your 401(k) plan.
Under the Employee Retirement Income Security Act (ERISA), the cash in your 401(k) is protected from additional taxes when it’s used to start a new business.
Taking advantage of tax benefits like these are why 401(k) rollovers have become a popular way to access money and fund new franchising businesses.
5) Business Partners
Working with a group of business partners is another common way to finance your franchise because it allows you to pool your money together.
Most entrepreneurs look for silent partners who will invest in your business and allow you to control the day-to-day operations.
If your business partners want to be more hands-on, setting up a partnership agreement gives everyone an opportunity to sort out responsibilities and expectations moving forward.
6) Stocks & Bonds
Like the 401(k) rollover we mentioned earlier, you can also use any stocks and bonds you own to create liquidity for your franchise.
Trading accounts with stocks and bonds can be overlooked sources of cash. Be sure to keep your personal accounts in mind when considering your financing options.
7) Home Equity
Home equity lines of credit use your home as the collateral for your loan. Loans like these tap the potential in your home to fund your franchise.
Rates are typically lower for these types of loans. Plus, your credit line can increase alongside your home as it increases in value.
These loans are much like a checking account that allows you to use the equity in your home to purchase a franchise.
Check Out These Additional Resources
We hope this article gave you a better understanding of how to finance your franchise with these proven methods.
Please note each financing option contains its own risks and uncertainties. It’s best to consult a financial advisor to determine which option is best for you.
At Del Taco, we’re looking for multi-unit franchisees who are excited to bring our fresh ingredients to new markets across the country.
Here are some additional online resources you may like to check out:
- How Much Does a Del Taco Franchise Cost?
- 5 Reasons to Purchase a Del Taco Franchise
- Which Taco Franchise Makes the Most Money?
If you have any questions, please contact our franchise sales and support team.