Funding

2 06, 2019

Why Not Use Both?

2019-07-08T13:28:38-04:00June 2nd, 2019|Tags: , , , |

Man walking into vault

Why Not Use Both?

Consider using multiple funding sources

by Mariah Bohn

You’ve probably heard the buzzword “diversification” in relation to the stock market; the practice of allocating investments in various sectors — banking, real estate, tech, energy, etc. — to reduce risk. The reasoning is that by investing in areas independent from the same market forces as each other, their differing reactions will protect you from losing the entirety of your investments to the same economic event.

The same approach is worth considering when funding your business. It’s important to think beyond merely accessing the funds needed to open the doors. You should weigh how your funding strategy will impact both your business and personal finances long-term. Rather than opting for a single method of funding, you might benefit from diversifying—by using a combination of retirement savings and a business loan.

A new business owner will typically choose one of these two options for funding:

Option 1: ROBS (Rollover as Business Start-up)
The ROBS program allows you to access retirement funds from a 401(k), individual retirement account, or another eligible retirement account without having to pay early withdrawal penalties or income taxes. ROBS has no credit-score requirements, needs no collateral, and incurs no debt, which improves the cash flow for the business. It is also generally the quickest way to obtain money.

Option 2: Business loan
You can access up to $5 million through the Small Business Administration (SBA) loan program for start-ups, acquisitions, expansions, and working capital. Business owners who may not qualify for conventional loans may be eligible for SBA loans because the government guaranty helps alleviate some of the lender’s risk associated with start-ups. Conventional loans, which are primarily used for expansions and upgrades, are available to strong borrowers with prior business ownership experience.

Option 3: ROBS + business loan
If you have retirement savings and meet the eligibility requirements for a business loan, you can combine these two methods to ensure more flexibility as your business grows.

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Here are some benefits of the combined, or diversified, strategy:

  • If you supplement a business loan with the ROBS as an equity injection, you’ll have access to more total funds but have a smaller loan and lower monthly payments than if you financed the business solely with a loan.
  • You can use a business loan to supplement the ROBS, reducing the amount taken from retirement funds.
  • You’ll have a reserve of available funds for future expansion. For instance, if you’re considering a multiunit purchase, this method preserves liquidity for financing subsequent units.

Many factors contribute to determining the best funding solution for each situation. To help you understand all of your options and the longterm impact of each, contact the franchise funding experts at FranFund for a free consultation: info@franfund.com or 877-FRANFUND or visit bit.ly/frandfund-fd.

2 05, 2019

Bank on It!

2019-05-03T15:10:28-04:00May 2nd, 2019|Tags: , , , , , |

Bank on It!

Find help landing your SBA loan

by Shay Mora

Even a low-cost franchise can require $100,000 to get up and running, and some need considerably more. Entrepreneurs often must line up financing for their start-ups or other major expenses. Many of them seek Small Business Administration loans but find the process challenging.

One source for assistance is FranFund, which has used its portfolio of top SBA lenders and SBA Express/7(a) Small Loan programs to help hundreds of new and existing franchisees receive funding. These loans are ideal for service-based businesses requiring $150,000 or less for a start-up, expansion, or working capital loan; some lenders go as high as $350,000.

Although the fast-tracking of SBA Express attracts many borrowers, the specifics of these loans often create confusion over eligibility, requirements, and terms. Following are answers to common questions about SBA Express/7(a) Small Loans.

Are all SBA Express Loans the same?
Yes. All SBA Express loans follow the same SBA rulebook regardless of lender. Many lenders advertise an SBA Express program, but most actually submit those loans as SBA 7(a) Small Loans to secure a larger SBA guaranty (up to 85% vs. 50% Express) as additional security because these typically don’t require personal collateral. Also, with the SBA guaranteeing 85% up to a loan amount of $150,000 and only 75% for loans from $150,000 to $350,000, many banks cap their programs at $150,000.

Where can I get an SBA Express/7(a) Small Loan?
Banks can be selective about the industries they work with, number of startups they lend to, and kinds of business costs they cover. Because it is challenging for borrowers to find a bank that is a good fit for their specific franchise, it’s wise to work with a lending consultant such as FranFund, which specializes in SBA loans and can match franchisees with the right lender.

Can I receive an SBA Express/7(a) Small Loan if I have bad credit?
Banks look at business owners’ personal credit score (FICO) and small business credit score (SBSS). If your personal credit score is below 680, you’ll need a good explanation and good liquidity/income. The SBSS scores a small business by its likelihood of making payments on time. You’ll need an SBSS score of 165+. A past bankruptcy, short sale, or judgment is not an automatic disqualifier as long as it is at least 3 years old and you’ve re-established clean credit (680-plus). You must not have any open collections, past-due student loans, unpaid child support, or tax liens.

Is a cash injection required?
If you have a business that has operated longer than two years and is successful, then a cash injection typically isn’t required. For start-ups, you can expect to contribute 10% to 20% of personal funds, meaning you can’t use borrowed funds such as a home equity line of credit or personal loan. Funds from a 401(k) or IRA rollover can satisfy this requirement, however.

How is the loan secured?
A lien on your business assets secures the loan. No personal collateral is needed, but a personal guaranty (an individual’s legal promise to repay the debt) is required from each owner with 20% or more ownership of the business as well as spouses, if their assets and/or income will be used to qualify.

What’s needed to close the loan?
The business should be within 60 days from generating revenue, which means these items need to be complete:

  • Training certificate (required by some lenders).
  • Business insurance.
  • Signed franchise agreement and SBA franchise addendum.
  • Signed lease agreement (if applicable) and the bank’s landlord consent waiver.
  • Business licenses/permits required by state and county.
  • Proof of equity injection (down payment).
  • Additional requirements if the business has a build-out.

How soon will I receive funds?
Funding can occur five to 10 days after all closing requirements above are completed. This allows time for SBA document completion, bank review and approval, and final signatures on the closing documents.

FranFund helps franchisees put the right funding strategy in place as a framework for long-term success. With ex-bankers on its team, quick preapprovals, and a 99% loan approval rate, FranFund makes the lending process as painless as possible.

Want to learn more about SBA loans and other financing options? FranFund designs all-in-one funding plans that grow with your franchise and set you up for long-term success. Whether you are considering leaving your current job to start a new venture or if you want to expand your existing operation, we are here to help. Get started today at bit.ly/frandfund-fd or email info@franfund.com.

3 04, 2019

Consider financing via your 401(k) even if your CPA advises against it

2019-04-03T15:37:10-04:00April 3rd, 2019|Tags: , , , , |

Consider financing via your 401(k) even if your CPA advises against it

by Tim Seiber, CFE

Most CPAs will discourage you from tapping your 401(k) to start or grow your franchise business. They usually give this advice because they’re either unfamiliar with the Rollover as Business Start-Ups (ROBS) program or are uncomfortable with the tax structure of a C corporation.

Generally, the benefits that franchisees receive from utilizing the ROBS program far outweigh any concerns. Since the IRS created ROBS through the ERISA Act of 1974, the program has been a great way for thousands of entrepreneurs to open their businesses debt free. So before you let your CPA persuade you that it’s a poor option, you should understand the specifics behind their negative view.

Defining a C corporation
Under the federal tax code, business entities are categorized as either pass-through or non-pass-through business entities, with the main difference being that pass-through entities are not required to pay corporate taxes. These include sole proprietorships, partnerships, and S
corporations.

C corporations are non-pass-through entities that are completely separate taxpayers from their owners and are subject to corporate taxes. This is often where pushback from a franchisee’s CPA comes in. Because income earned by the C corporation is taxed at the corporate level and any distributions made to stockholders (i.e., wages) are taxed at the stockholder’s individual tax bracket, the potential for double taxation scares off tax advisers who are unfamiliar with the other benefits of the ROBS program.

But this should not be the only consideration when looking at ROBS as a funding option, because while double taxation might occur, the
C corporation structure offers advantages for small business owners versus pass-through entities.

Advantages of a C corporation
Although pass-through businesses are not subject to federal corporate income taxes, they can still face a substantial tax burden from federal, state, and local taxes.

Last year’s new tax reform significantly reduced the tax disadvantage of utilizing a C corporation structure. The corporate tax rate decreased to 21 percent, which is lower than the tax rate for pass-through income, and because most individual tax brackets also decreased, distributions are taxed at a lower rate as well.

Operators of C corporations may also withdraw salaries from the corporation profits, which aren’t taxed at the corporate level. If the company pays its employees enough to offset the entire net profit, then no corporate income tax is due, eliminating the double taxation
potential.

The benefits of a C corporation extend much further than a lower tax rate, however. Other advantages include:

  • The opportunity to shift income and retain earnings within the company for future growth.
  • No requirement to make the fiscal year coincide with the calendar year.
  • The ability to deduct 100 percent of medical premiums.
  • Eligibility to deduct charitable contributions as a business expense.

And the most significant advantage of all? A C corporation is the only business entity that supports ROBS, which is often the only viable funding solution for many start-up businesses.

Tim SeiberWant to learn more about financing options for your franchise? FranFund designs smart all-in-one funding plans that grow with your franchise and set you up for long-term success. We are here to help if you are considering leaving your current job to start a new venture or if you are looking to expand your existing operation. Get started today at bit.ly/franfund-fd or email Tim at taseiber@franfund.com.

27 07, 2018

Funding Your Dream

2019-03-12T11:54:19-04:00July 27th, 2018|Tags: , , , , |

Business Owner

Funding Your Dream

by Dallas Kerley

Entrepreneurs are dreamers, innovators, and go-getters. They are driven enough to start their own businesses. Many, however, lack the funding needed to open the doors. Or, do they?

There are plenty of ways to fund a franchise. Yes, you can borrow from the bank or find investors; of course, that means you’ll be starting your business in debt. But what if you had a pile of cash that allowed you to start your franchise cash-rich and debt-free? If you have money in a qualified retirement plan, you are cash-rich and can fund your franchise with a process known as Rollovers for Business Start-up (ROBS).

How does ROBS funding work?

A Rollovers for Business Start-up plan lets you use existing qualified retirement account funds, such as a 401(k), 403(b) IRA, or other qualified retirement vehicle, to fund your franchise tax-deferred and penalty-free. Because of the way a ROBS is structured, you can still contribute funds to a tax-advantaged retirement account as your business grows, enabling you to continue to plan for your retirement.

How do I get started?

Using retirement funds for your start-up involves four key steps:

Step 1: Establish a Corporation. In order to be eligible for a ROBS arrangement, you must form a new corporation.

Step 2: Create a New Retirement Plan. The corporation will sponsor a new retirement plan that has provisions allowing investments in the parent corporation stock.

Step 3: Transfer Retirement Funds. Once the plan is established, your existing retirement funds will be rolled over to the new plan. Because the funds are rolling from one qualified plan to another, no taxes are due and there are no withdrawal penalties.

Step 4: Launch the New Business. Once stock is purchased in the new corporation, you now have the cash to invest in your new franchise.

The Advantages

Tax Benefits. Under the ROBS plan, you maintain tax-deferred status and do not face any early withdrawal penalties.

Flexibility. The funds can be used for many different purposes. The money can be used as a cash injection for an SBA loan (Small Business Administration), to pay franchise fees, build or renovate a site, or buy equipment. You can even use the funds to pay yourself a salary. If you don’t need the money, don’t spend it—you aren’t required to use all the funds you’ve transferred.

Ease and Speed. In some cases, you can get access to your funds in as little as 10 days.

Funding isn’t dependent on your credit. Unlike other borrowing options, a ROBS doesn’t impact your personal credit. If you borrow any money for your business, your personal credit may suffer. Plus, if you have issues with your credit, you can still use the ROBS for your franchise.

Peace of Mind. Using your retirement plans means you are not incurring additional personal debt. And you’re spared the headache of negotiating with lenders for funding.

Need help figuring out how to best fund your franchise? Benetrends helps entrepreneurs make their dreams a reality. The ROBS program, known as the Rainmaker Plan®, provides guidance and support, so you can focus on your business. To learn more, visit www.benetrends.com.