Some may think of this question as the proverbial ‘chicken or the egg’ dilemma. But, the answer is quite simple: one should consider both the franchise and financial options at the same time. By Diane Rosenkrantz

Some may think of this question as the proverbial ‘chicken or the egg’ dilemma. But, the answer is quite simple: one should consider both the franchise and financial options at the same time. Just like a realtor and a home-buyer would look at homes, the realtor would not show the buyer a $400,00 home if the buyer only qualified for a $200,000 mortgage. By understanding financial options at the same time the business is being reviewed, the buyer is able to make an informed decision and the consultant is better able to serve the buyer as well.

There are only two types of small business funding: debt or equity. The two are not mutually exclusive since they can be used together to create a full funding package.

Debt Funding

Funding a business with debt means you are borrowing money that must be repaid, such as an SBA Loan or Lines of Credit. Lenders look at a number of factors when reviewing a person’s financials. Key elements include non-borrowed cash for the injection, credit scores, collateral, cash reserves, debt, and current income. Additionally, banks will look at the borrowers’ experience/resume, Personal Financial Statement, and their projections for expenses/cash flow.

Equity Funding

Funding a business with equity is an attractive option for many franchise buyers. Any pre-tax retirement funds that are not from a current employer (i.e. traditional IRA, 401(k), 457, 403b, TSP, etc.) can be rolled over into a new account using a process called ROBS (Rollover as a Business Startup). A ROBS is not a loan and the funds are not borrowed – they are used to capitalize the new business or to recapitalize an existing business. Also, for buyers who do not have enough cash on-hand for the equity injection for an SBA loan, these rollover funds satisfy this requirement, making an SBA loan plus ROBS a great combination for many entrepreneurs.

Exploring funding and franchise concepts simultaneously just makes good business sense. After all, you can’t have the chicken without the egg and vice versa.

For more small-business tips, visit the Tenet Financial Group blog at tenetfinancialgroup.com/blog.

– Diane Rosenkrantz

Diane Rosenkrantz has been a Senior Consultant with Tenet Financial Group for more than a decade, specializing in 401(k) Rollovers, SBA Loans, Unsecured Lines of Credit and more. Her career includes 30-plus years in consulting, customer service and the pension/insurance industries. Diane can be reached at diane@tenetfinancialgroup.com or 413-754-3298.