Should I Use Personal Funds to Start a Franchise?

I’ve been doing a lot of research lately about franchises and I'm assessing the financial state I should be in to buy a franchise. How much of my personal funds should I use to start a franchise? Should the majority come from loans or investors? How much money should I put aside after buying the franchise?

There are lots of sources you can use for funding your franchise. The most common are loans, investors and personal funds. Each has pros and cons and the right answer for you depends on your personal situation.

Loans are what people usually focus on first. The advantage of using borrowed money is that you get to retain your personal resources as more protection against a "rainy day" which might happen in any new business startup. The disadvantage of using loans is twofold. First, you have debt service payments that you'll have to make every month so it adds another bill to pay before you get to produce any cash from the business that you can put in your pocket.

Second, the lender often puts additional restrictions on you in relation to the conduct of the business, especially if your loan is an SBA-guaranteed one. You might find either the mandatory payments or the covenants and restrictions associated with loans make this source of funding less than ideal.

Another source is investors. This has a potential big advantage because you usually don't have any mandatory payments set up with these sorts of funds. The investor goes for a ride with you hoping that the business succeeds and then he or she will get a nice chunk of the profits as a return on the investment.

That, of course, is the rub with this type of funding. You often have to give up a sizable share of the upside of the business in order to receive the money.

The third source is personal funds -- savings, stocks, bonds and other assets you can turn into readily accessible cash. The biggest advantage to using these types of funds is that you don't have debt service payments, you don't have operating restrictions placed on you and you don't have to give up a big chunk of the upside potential of the business to someone else.

The disadvantage is that if you use too much of your personal funds and then run into a situation where you need more money for the business, you may not be able to raise a loan or attract an investor at that point in time.

Carefully review each option to determine what your alternatives are. Consult with a financial advisor who knows your situation if you are not well versed in these matters. Then select the best course of funding to meet your resources and goals -- which is often a combination of two or more of these approaches.

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