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It's nearly impossible to start a business without any money, unless you are
just selling your skill. Otherwise, you will need money for rent,
inventory, staff, insurance, and much more. Franchise startups will
probably need at least 100k to get started. It is not advisable that you
pay for the whole thing in cash, unless you have millions lying around.
Otherwise a portion of it should be financed. You will want to maintain
some level of liquidity, in case anything goes wrong, or you want capital to
expand your business.
You can get a loan in a number of ways, one of which is a small business
loan. During the 90s, the banks in the US began cracking down on small
business loans, due to heavy fraud and a number of other reasons. It is
much more difficult to get a loan now for new businesses. Nonetheless, you
should finance a portion of your franchise. Do not put every dime of your
life savings into your new franchise. You will have no room for error.
The interest on small business loans can be deducted from your profits.
You still have to earn some money to pay for the interest, the write off really
is moot in the beginning, since you will barely turn a profit. If your
business fails, you can file bankruptcy, and you may be able to write off the
small business loan. However, if you use your home or other assets as
collateral, the bank has the right to sell your assets for the existing loan
balance. It is more common now for banks to require collateral for
small business loans. If you would take out a $100k loan, you will
probably need $100k in assets, i.e. a house, or a car.
Other ways of financing including a loan from your franchisor. Many
franchisors are aware of the heavy start up costs. They have faith in
their product, so they offer loans to their franchisees, in the hopes that they
will be repaid with the earnings. You will repay them on a schedule, with
interest. You can also borrow from friends and family who may possibly
also want to invest with you in this venture.
Though its not advisable, many people also refinance their homes, or take out
a home equity line of credit. The major problem is if your business fails,
you stand the possibility of losing your home. You can tax deduct a home
equity line of credit. The tax rules are different for refinancing, since
you have already deducted that interest in the past. Check with an
accountant.
The interest rate charged to you will be the prime rate, plus whatever the
markup is. The markup is determined by the market, as well as your credit
rating, and the risk level of your venture.
Banks want to see that you can invest some form of cash, usually 25% of the
amount needed. Most lenders will prefer to provide financing for the hard
assets, such as equipment and inventory, and will want the franchisee to be in a
position to pay for the initial franchisee fee, training costs, and initial
marketing costs. Lenders want to see that you are putting your assets at
risk, before you put their assets at risk.
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