Franchise Financing Options: The Pros and Cons
Owning and operating a child education franchise business is one of the most profitable investment opportunities in the education industry. This is because there are many families who are now willing to spend money on their children’s education.
The reason behind this, according to some entrepreneurs, is that parents have started to realize the importance of childhood education and that state schooling does not always offer the best education.
Parents want their children to do better and be better than themselves, and so are willing to invest in their children’s future by paying for homeschooling, extra tuition, and private schooling. Therefore, child education can be a lucrative option for those who want to own a business that makes a real difference and delivers high-profit potential.
The question is, how do you finance investment into a child education franchise?
Financing options to get your child education franchise
Financing a franchise is a long-term commitment. When you buy a franchise, you are not only buying the rights to operate in a particular territory, but you are also taking on the responsibility for operating that franchise. You will pay the franchisor ongoing commissions or royalties, and you will be supported with marketing materials and training.
The most common sources of financing that entrepreneurs use when buying an education franchise are personal savings or retirement funds, underperforming investments, home equity loans, traditional loans, and credit cards. You might also be able to access funding from the franchisor.
Let’s look at these options in turn.
Self-funding
Self-funding your franchise purchase is the most popular way of investing in a child education franchise. Cash in the bank pays next to zero interest. At the time of writing, the yield on a U.S Treasury Bond ranges from 0.06% (1-month) to 1.9% (30-year). Equity returns have been strong over the last few years, but will they continue to be so?
If you have cash in the bank or underperforming investments – or retirement funds that you can release – self-funding could offer you a far better return on your money. It’s why entrepreneurs build businesses rather than put all their cash into the stock market.
Traditional bank loans
You should weigh the pros and cons of using traditional bank loans before considering this method of financing.
The bank will assess your ability to repay the loan from the potential proceeds of the business. You may need to put up collateral – such as your home – to underwrite the loan. Therefore, your home is at risk if the business doesn’t make the profits you predict. You are also at the mercy of interest rates set by the bank – and if interest rates rise, you could come unstuck.
If you are short of collateral or personal assets, you are likely to be charged a higher rate of interest: your loan repayments will be higher, and this could affect your cash flow.
SBA loans
The U.S. Small Business Administration provides funding to small businesses and entrepreneurs, and this includes those who want to buy a franchise business.
You’ll need to assess if you qualify for an SBA loan – and you’ll need to use other financial resources (including personal assets) before applying.
If you qualify (and most businesses do), you’ll find that SBA loans are a great way to get funding for your business. They are easier to get than other loans, have lower interest rates, and provide better terms. You may be able to secure longer repayment terms and incorporate flexible payment options.
Online lenders
Online lenders also offer loans for those wanting to start a business. They provide you with an opportunity to cover all the needs of the business. All you need to do is submit your application form and get approved for the loan.
Borrower requirements are usually more relaxed than those requested by a traditional bank, and the application process is usually much faster, too. However, you may need to show experience of being in business and have a high credit score. Interest rates that you will pay will generally be more expensive than those charged by traditional banks.
Franchise partnerships
If you are short of the funds you need to buy a child education franchise, you might consider partnering with a silent investor. This investor may also have the business experience to help you in your business if you wish. You’ll have control of your business (subject, of course, to the franchisor agreements).
On the downside, you should consider what may happen if the partner wants to pull out before you are able to buy them out.
You might also partner with family or friends. Combining different strengths can be good for your business, and you can pool ideas as well as money. However, business decisions will never be wholly yours to make, and poor communication can lead to disagreements that can ruin otherwise great friendships.
Franchisor financing
Often, this is the best way of funding your business investment other than through self-funding. The franchisor knows their business inside out. They understand the risks and the potential profitability.
You may be able to defer payments through your startup period, make payments on a sliding scale, and secure as much as 75% of your funding requirements. You may be able to structure the loan by paying simple interest or a balloon payment in a few years.
Credit cards
Using a credit card to fund your franchise as it grows can help you improve your credit score and provide quick cash when it is needed. If you miss a payment your credit score will fall.
Credit card interest rates are high. Your repayments could be a severe drag on your business – and this could damage your chances of survival. A study by the Ewing Marion Kauffman Foundation found that for every $1,000 of credit card debt a new business takes on, the chances of closing increase by 2.2%.
How to decide which funding option is best for you
If you are considering buying a child education franchise, it’s crucial to finance it appropriately. There are pros and cons to all the financing options we have discussed above: different borrower requirements; different interest rates; the ease with which you can access funds. These are just a few examples.
Before deciding on which funding route to take, you should consider your own personal situation and your personality, too. What may seem like a good idea for one person may not be the best choice for another because of their own personal financial needs and limitations.
The best advice when deciding how to fund a franchise purchase is to take your time, do your research, and think about what you are looking for in a business. With the help of professionals – such as lawyers, accountants, a franchise consultant, and the franchisor – analyze and assess the risk. This will help you in understanding the funding factors that would affect your profitability and help you in making a better funding decision.
Where do you start?
If you’re considering becoming an education franchisee, take our franchise assessment to find out if you have what it takes.