Aspiring entrepreneurs have two options when they want to open a business: start from scratch or buy a franchise. The first option can be exciting and intimidating at the same time since you’d be starting from the ground up, do all the work to make your brand known, and build a customer base.
On the other hand, buying a franchise already grants you an established brand, a customer base, and you’d receive assistance to nearly all aspects of the business.
Either way, starting a business involves a huge capital as well as considerable risks. The decision to start from scratch or buy a franchise lies completely on you, after pondering your means, circumstances, and risk aversion.
But if you’re still uncertain which one to choose, here’s a short and simple guide before you proceed to your best financing options:
Start From Scratch vs. Buy a Franchise
Let’s say you want to open a food business specializing in gourmet sandwiches. If you’re starting from scratch, you need to invent your own unique recipe, create your own distinct branding, train your employees yourself, and strategize an effective marketing tactic to attract customers and make your brand well-known. It’s a lot of work with inherent risks such as not being able to sell well because you’re emerging into the industry as a new brand with potentially bigger competitors.
If you start a sandwich shop franchise, you’d be launching with an established business model, a strong customer base, and you’d be using the same promotional materials the franchisor uses. In addition, the franchisor will also assist you in training your employees, finding a location, connecting with suppliers, setting up your shop, and running your business. If you’re less risk-averse, a franchise may be the better option for you.
Where to Get Funding
1. Personal Savings
As long as you can still pay for your mortgage, insurance, and other essential living expenses, then shelling out a portion of your personal savings to start a business should be feasible for you.
Small Business Administration (SBA) loans demand a lower down payment, and your monthly outlays may be more manageable. It’s one of the most desirable options for those looking to finance a franchise or their own business. If you have a good credit score, you have high chances of being granted this loan.
You may also consider a commercial bank loan. If you have a strong financial history and an impressive credit score, you’d be offered better terms and interest rates by the lender. Bear in mind that both types of loans may require a lot of documents from you, so you need to be able to present those before your request for a loan gets processed.
3. Franchisor Financing
Many companies that open franchise opportunities also offer tailored financing programs for their franchisees. Talk to your franchisor if they offer this. If you manage to obtain financing from your franchisor, the funds you’d receive will already cover everything the business needs, so chances are you no longer need to seek funding from another source.
4. Alternative Lenders
Alternative lenders have less strict requirements, but they’re typically more expensive, and the repayment terms may be shorter compared to traditional loans. The principal amount you can borrow tend to be lower, too. However, it can be a good option if you need financing within a short period of time. It can also be worth it if you need to finance your existing loans quickly, and if you’re unable to qualify for SBA or commercial bank loan.
Crowdfunding sites are all over the internet, but for starting a business, look for ones specifically made for the industry you’re venturing in. This may be a good option if you’re not very lucky with loans. Use your creativity to attract investors.
You can also determine whether starting from scratch or buying a franchise works better for you by determining if you’re financially ready for your first business. Sometimes, it’s your finances that will decide which option is more suitable for you.