Franchises are an excellent way for individuals to become business owners, while at the same time reducing the risks associated with starting a business. That’s because owning a franchise comes with a pre-built business plan that has demonstrated success.
The problem is most franchises require the franchisee to put down a substantial amount of capital. But that isn’t the case for every franchise. So let’s take a look at whether it is possible to start a franchise with no money.
What is a franchise?
A franchise is a method of expanding a business where the owner of a business (franchisor) gives an investor (franchisee) the right to use their brand, trademarks and systems in exchange for money.
What are the costs of owning a franchise?
There are three main fees associated with running a franchise:
- Initial fee: Most franchisors charge an initial fee for the right to operate a franchise as an upfront fee. This fee usually ranges somewhere between $10,000 and $100,000 (or more depending on the franchise business).
- Royalty fees: Once the investor has paid the initial fee and started their franchise, they then have to pay royalties. The structure of these royalties will change from one business to the next, but most are a percentage of revenue ranging from 5 to 50%.
- Marketing fees: Many franchisees must spend a specified amount on marketing each year. This helps ensure you are properly promoting your business in the local market. These fees are usually between 1 and 4% of revenue.
In addition to these fees, you will have normal operating expenses just like any business. This includes inventory, equipment, wages, licenses, etc.
How to obtain funds for a franchise opportunity
With all these expenses, you’re probably wondering how anybody can start a franchise in the hospitality industry without any money. The reality is, to get into any franchise, more often than not you need to have money to invest. But don’t get discouraged just yet!
There are many ways to obtain funds when you have little to no money on hand. Here are some ways you can do it:
- Franchisor financing
Brands realize that most people aren’t sitting on a pile of freed up capital that they can use to get themselves started. That’s why most franchisors will offer financing options to potential franchisees.
This financing is designed to help with startup fees. To take advantage of franchisor financing, you usually have to have impeccable credit. The franchisor may also require some sort of investment to show you are committed. While this may not eliminate all initial start up fees, it will help reduce them greatly.
- Bank loans
If you don’t have any cash on hand to invest, you can try a traditional bank loan. Bank loans usually require you to meet specific criteria. While these criteria will vary by bank and loan type, it generally includes:
- An excellent credit score
- A credit utilization ratio under 30%
- A good history with banks
The bank will also want to know who you are hoping to franchise with to ensure their business model has been successful in the past. That means choosing a reputable brand with a long history of success.
- Home equity loans
Another option for accessing capital for investment is a home equity loan. To take out a home equity loan, you must owe less on your home than it is worth if you were to sell it.
This option can be riskier because you are putting your home at stake if the loan were to default. However, the banks understand this risk and will usually not allow homeowners to take out a loan equal to the total equity available on their home.
- Partnerships
If you don’t have enough capital to start a franchise, you could partner with someone who can finance the investment. This can be a family member, a friend or a colleague.
Just remember that you will be sharing control with this person - they should be someone you trust and you should always have a partnership agreement in place before you start doing business together. This will clarify roles, responsibilities and the share of profits and losses that each is responsible for.
If you choose any of these financing options, be sure to find a brand that:
- Is established
- Has proven success
- Offers coaching and training
- Has little to no competition
- Has a strong marketing strategy
- Is recession resistant
- Has no legal issues, including pending litigation, convictions or known issues with franchisees
Not only will this help reduce business risks, but it will also help with the approval process and attract investors.
If you are interested in starting your own business, contact us today for more information on how franchising with Sculpture Hospitality can set you up for future success.
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