Franchising · Financial Services

What is the best way to get a line of credit when starting a new franchise?

Kyle Fowers Founder at Gear Backer

July 9th, 2015

I am going to buy into a franchise and I just have enough capital on hand for the franchise fees and setting up shop. I want to have a line of credit of about $20k as a cushion just in case. What is the best way to get the line of credit? Should I go through the credit union where I am going to have my account or are there better ways to do it?

Lane Campbell Lifelong Entrepreneur

July 9th, 2015

I would use a professional employment organization or a staffing company to hire labor if I was concerned about making payroll.  Don't use a secured line of credit to do that.  Don't hire employees till you can make payroll.  Don't do the franchise till you are capitalized properly. 

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

July 10th, 2015

Credit lines are good for bridging timing gaps in cash flow, e.g., you sell something today but don't get paid until a month from now. What they're not good for is a last resort for an under-capitalized business, "as an absolute last resort."

Kyle Fowers Founder at Gear Backer

July 9th, 2015

It would be to cover things such as payroll or other miscellaneous expenses just in case as an absolute last resort. I am just seeing what are some options. In the end I might not need it which is what I prefer but I don't want to have to scramble for cash if I don't have to. 

Lane Campbell Lifelong Entrepreneur

July 9th, 2015

What do you want to use the credit to pay for?  Can you do a lease instead?  Do you need it to cover payroll?

Alarms are going off for me though.  You should not be looking for debt as you open the business.  

Patrick Hidalgo

July 10th, 2015

While I agree with Lane, if you have equity in your house, you could look into a Home Equity Line of Credit (HELOC). Getting a line of credit at the corporate level from a bank or credit union is harder than you think and you might have to pledge personal assets anyway.

Cameron Ackbury President US Operations | Investor | Seeking top tier University entry level Sales, Marketing, PR Candidates

April 11th, 2016

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Larry LaFranchi Helping talented professionals focus on entrepreneurship and franchise opportunities.

April 9th, 2016

It's not uncommon for people purchasing franchises to secure a loan to help cover all the projected costs (perhaps 50% or more) including working capital needs up to the breakeven point. If the franchise is listed in the SBA registry it can help clear the way for an SBA guaranteed loan. Look for a bank in your area that is a frequent lender of SBA guaranteed loans. Also, another way to finance a franchise is to look for a specialist that can help you self-direct funds in your retirement account without penalties/taxes associated with withdrawals. These folks need to help you do the paperwork so you don't run afoul of the IRS.