Funding in a Recession: How to Stay Informed and Improve Your Lending Options

by Eric Schechterman

The decision on how to secure the funding you need to buy the franchise opportunity of your dreams can feel just like the process you went through when deciding what business to buy. In good or bad economic times, it’s necessary for prospective owners to educate themselves on the lending landscape, explore all of their options, and do enough due diligence to find the best available financing option.

With a potential recession looming…below are some helpful advice about staying educated and informed of your funding options, along with some tips and advice to improve your opportunity to secure financing.

Your Lending Options

Entrepreneurs looking to fund the purchase of a franchise operation have many funding options to choose from, including banks, the U.S. Small Business Association (SBA), third-party lending from the franchisor, alternative lenders, crowdfunding and even retirement funds. The most important step to take is to compare all of your options, as each come with its own set of pros and cons. With so many options, below is a brief summary of the options most often seen in the franchise funding space…

Collateral Based Funding & Loan Programs

These funding options allow candidates to leverage their assets via loans, lines of credit, or more. Also known as debtbased funding as the secured funding will not only leverage a primary asset but will likely include interest payments over the term of the loan.

SBA loans –

An SBA Loan is a government-backed loan to help American entrepreneurs fund their businesses. The good thing about an SBA Loan is that the bank is lending you the money and the SBA is backing that loan up. So, in addition to your personal guaranty, the government is guaranteeing the loan which will make the bank feel more confident. There are various SBA Loan programs; available to fund a wide range of business models. SBA loans are a very popular option for franchise finance. You can essentially fund any purpose - working capital, equipment, inventory, payroll, build out, furniture and more. Loan amounts can range up to $5 million with terms of 10 to 25 years and the interest rates are capped and typically low. This is a very flexible and very popular solution for franchise financing. There are no pre-payment penalties with SBA loans which gives you control of when you pay your loan off.

Lines of Credit -

The two most common options are a Home Equity Line of Credit (HELOC) or a Securities-Backed Line of Credit (SBLOC). A HELOC loan uses the equity of the borrower’s home as collateral while a SBLOC loan lets you access the value of your investment portfolio (except retirement accounts) without incurring tax consequences.

Equipment Leasing -

Whether you need a few cars or a fleet of trucks, equipment…lenders can design a lease plan that meets your unique needs and maximizes your working capital. The leasing solution can help you stretch your budget, improve your cash flow and keep your business on the move. This also is designed as a lease-to-own program and can be used to support additional territories, equipment, vehicles in the future.

Self-Funding Strategies

Often, most people will start by trying to fund a business on their own by using their personal savings. While common, it is not the only way an entrepreneur can start their business without debt. It’s a common misconception that you can only use your retirement funds to purchase investments like publicly traded stocks, bonds or mutual funds. In reality, you can use most retirement plans to buy a business— tax-deferred and penalty-free. In fact, tens of thousands of entrepreneurs have used their retirement savings as a viable resource for funding a business. This is called Rollovers as Business Startups (ROBS)

ROBS Funding –

this method of funding allows you to use your 401(k), IRA, 403(b), or other qualified retirement account to fund a business – with no penalties, upfront taxes, or debt. It can also be used as the necessary capital injection for a Small Business Association (SBA) loan. This program is similar to buying stock in a public company, except instead you’re investing in your own privately held company. There are two key pillars to this funding strategy, rolling over funds from one qualified plan to another and a company structure that allows the plan to own stock in the corporation. This combination is used to create the Rollover for business Startup business funding option.

Despite economic uncertainty, and even if a recession becomes reality in the U.S., it doesn’t mean that financing and funding will grind to a complete halt. But it’s possible that the lending market will tighten up further, making it even more important than ever to educate yourself on your options so you can be prepared to meet the challenge of securing funding during a recession.