Financing Advantages of Buying a Franchise in 2023

Posted on April 14, 2023 by The BizBuySell Team in Business Financing, Buying a Businesss, Franchising

For entrepreneurs looking for business opportunities in the year ahead, franchise businesses offer a unique and trusted business model. Owning a franchise has become increasingly popular, with Guidant Financial, reporting a steady 12% year-over-year growth. With an uncertain economic outlook projected for the year ahead, the International Franchise Association’s 2023 economic report projects modest growth for the industry. Their outlook anticipates an increase in franchise establishments by nearly 15,000 units and adding approximately over 250,000 jobs. For prospective business owners, financing options for buying a business may favor the proven business model and record of success that franchising offers.

The Benefits of Buying a Franchise

The franchise sector is responsible for approximately 3 percent of the United States’ gross domestic product (GDP), totaling $825 billion, and 8.4 million jobs. There are many advantages to starting or buying an existing franchise. In addition to the turnkey aspects to buying a franchise, prospective franchisees benefit from the support provided by the corporate franchise. A successful business plan and proper training of managers and employees can be invaluable to entrepreneurs, providing a strong foundation for success.

Less Perceived Risk Purchasing a Franchise

Between rising inflation, supply chain disruptions, and the March 2023 banking crisis impacting midsize and regional banks, economic concerns regarding lending remain top of mind for prospective business owners. For those looking to buy or start a business this year, franchising offers a unique opportunity, as lenders take extra precautions to guard against any potential risk. With a proven business model, an existing cash flow and proof of financial stability, and the potential of multiple locations that can generate a larger revenue stream, funding a new franchise unit may carry less risk than a new independent business.

There are many financing options when looking to buy a business. In addition to self-financing and conventional loans, prospective franchisees should explore whether a 401(k)/IRA funding or Rollover as Business Startups (ROBS) or an SBA 7(a) loan is the right option for financing a franchise business.

Rollover as Business Startups (ROBS) for Franchises

When it comes to financing a franchise purchase, one option to consider is a ROBS plan. For entrepreneurs with a qualified retirement plan, you can rollover your savings to start a business. One of the prime benefits of a ROBS program is that money withdrawn from a 401(k) or IRA retirement fund provides financing without an income tax or withdrawal penalty. Like all financing options, there are pros and cons to consider. Consult with one of the many lenders who specialize in rollovers for business startup programs to determine if this is the right financing option.

SBA 7(a) Loans for Franchises

The Small Business Administration (SBA) is a government agency that partially guarantees a percentage of a bank-financed loan to small businesses. The allows lenders to offer more favorable terms than some conventional loan options. In today’s economic climate, franchisors may have leverage in securing financing because of their unique business model and record of success.

Current Interest Rates for SBA 7(a) Loans

While lending practices change with the economic climate, one benefit of an SBA-backed loan is the low interest rates. Interest rates, both fixed or variable, are negotiated between the borrower and the lender, with the upper limit being set by the SBA. These maximum rates are linked to the current prime rate, the London Interbank Offered (LIBOR) rate, or a custom peg rate. For most 7(a) loan programs, the SBA can guarantee up to 85 percent of loans of $150,000 or less, and up to 75 percent of loans above $150,000.

Franchising Opportunities in 2023

With over 90% of respondents to BizBuySell’s quarterly Insight Report indicating their plans to purchase a business within the next two years, franchising is something to take into consideration. The franchising sector provides a well-established business model and accessible financing, creating a viable route to business ownership.

See BizBuySell’s Franchise Directory to find options in a wide variety of business categories.