business

How to Finance a Franchise

You have a plan. Now, what about the money?

Interest rates for small-business loans are low, ranging from 3% to 5%, but tighter credit standards have made them difficult to get. Loans backed by the Small Business Administration, which are offered by private lenders, are sometimes easier to qualify for than non-SBA loans. (Read about SBA-backed loans.)

Before the housing market collapsed, many franchise buyers used home-equity lines of credit to finance their operations. Some still do, although this source of financing puts your home on the line.

Another potential source of financing is your 401(k) plan or individual retirement account, although depleting your retirement nest egg calls for careful consideration of the pros and cons. Ordinarily, pulling money from a tax-deferred account triggers income taxes and an early-withdrawal penalty if you’re younger than 59½, but there is a strategy you can use to avoid the tax hit. Read about how one couple funded their business by tapping home equity and their 401(k)

First, set up your business as a C corporation with its own 401(k) plan. Once the company’s 401(k) is established, you can roll your personal 401(k) into the plan and invest the money in company stock. The proceeds may be used for “any necessary and ordinary business expense,” says David Nilssen, chief executive officer of Guidant Financial, which helps franchises and other small businesses arrange financing. Most tax-deferred retirement plans are eligible for the rollover, and the strategy appeals to franchise buyers who don’t want to go into debt, Nilssen says.

To avoid trouble with the IRS, hire a lawyer or financial firm that specializes in these transactions and understands the rules. Otherwise, you could get stuck with a hefty bill for taxes and fees. Guidant Financial charges an upfront fee of $4,900 plus $119 a month for ongoing recordkeeping and administrative support.

Whether you use home equity, a loan, your 401(k) or personal savings, be sure you set aside enough money to live on until your business turns a profit.

Most Popular

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How
social security

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How

It’s always smart to maximize your Social Security benefits, and if you are divorced, one way to do that might be to take them based on your ex’s earn…
May 13, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Week
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Week

The IRS will start issuing automatic refunds in mid-May to people eligible for the unemployment benefit tax exemption.
May 14, 2021
18 Worst Things to Buy at Dollar Stores
spending

18 Worst Things to Buy at Dollar Stores

These discount retailers stock plenty of bargains, but some of the merchandise isn’t worth the buck.
May 14, 2021

Recommended

5 Ways to Prevent Working Mom Burnout
careers

5 Ways to Prevent Working Mom Burnout

Practical advice on managing the demands that come from handling a career and a family at the same time … from one working mom to all the others out …
May 15, 2021
IRS Gives Truckers a Tax Break in Response to the Colonial Pipeline Shutdown
Tax Breaks

IRS Gives Truckers a Tax Break in Response to the Colonial Pipeline Shutdown

The tax penalty for using dyed diesel fuel for highway use is temporarily suspended.
May 13, 2021
10 Ways to Fail Miserably at Office Politics
careers

10 Ways to Fail Miserably at Office Politics

Successfully navigating the workplace takes social skills as well as job smarts. To get ahead, make sure you avoid these 10 office politics blunders.
May 2, 2021
Reliving a Harlem Renaissance
Business Costs & Regulation

Reliving a Harlem Renaissance

After a tough winter, two sisters look forward to reviving their restaurant’s business.
April 29, 2021