What is equity funding?
This is the cash injection made into a new business enterprise by the owner(s). Every business purchase requires some type of cash injection. There is no such thing as a “no money down” deal in franchising. In fact, most franchisors require a minimum investment from a new franchisee. Many people have the majority of their net worth tied up in their retirement accounts and homes, which can present a problem when trying to capitalize a business. If during your consultation with a FranFund financial consultant it is determined that utilizing retirement funds is a viable alternative for you, FranFund will assist you through the FranPlan.
What is debt funding?
The new business or franchise owner borrows money to capitalize the new enterprise. Debt can consist of an SBA or conventional loan, a line of credit, or a home equity loan.
What is working capital?
Additional funds that may be used for any legitimate business expense.
What is total project cost?
Includes the personal equity injection plus the additional funding needed to equal the capital required.
What does a business plan include?
The document details the objectives for the business and establishes processes and measures for meeting those objectives. This will include information about the history of the franchisor, your proposed business, the management experience of the owner(s) and an understanding of the marketplace.
What are start-up costs?
Also called the initial investment, this is the total estimated cost for establishing the business, including the franchise fee, initial fixed assets, leasehold improvements, inventory, deposits, other fees and costs, and the working capital needed during the initial start-up period (first three months). It is also known as an Item 7 disclosure and can be found in the FDD.
What is a Franchise Disclosure Document (FDD)?
This legal document is required by the U.S. Federal Trade Commission to be provided to prospective franchisees by franchisors. FDDs are updated annually and consist of 23 sections called items, which explain the company history, the fees and costs, contractual obligations, unit data and more. Don’t make a move without reviewing it!
Working With FranFund
What does FranFund charge?
FranFund offers our initial consulting services at no charge. Once a capitalization solution has been identified, and you engage us as your funding partner, FranFund charges a fee on a per product basis. You can find more information on pricing here.
How do I know which funding solution is right for me?
That’s where the FranFund team comes in. Your dedicated financial consultant will work with you to understand your financial needs and business goals, then identify and customize the best capitalization strategy to get you where you want to go.
How long does the funding process take?
Many factors can affect funding time such as the source of funds and the scope of the project. For example, utilizing the FranPlan could get you funded in as little as 10 business days, while a business loan may take up to several weeks. Your FranFund consultant will work with you to determine a timeline once you agree upon a capitalization strategy.
What do lenders consider when reviewing a loan application?
Your FranFund financial consultant will work with you to develop a well-articulated, complete loan request package that addresses the key points lenders require. Learn more about the four main qualifiers here.
Are SBA Express Loans all the same?
Yes, all SBA Express loans have to follow the same SBA rulebook, regardless of the lender. Although many lenders advertise an SBA Express program, most lenders actually submit those loans as SBA 7(a) Small Loans to get a larger SBA guaranty (up to 85% vs. 50% Express), as additional security since these typically do not require personal collateral. Also, since the SBA guarantees 85% up to a loan amount of $150K, and then it drops to 75% for loans from $150K to $350K, a lot of banks will cap their programs at $150K.
Where can I get an SBA Express/Small Loan?
FranFund works with many banks who offer the Express Loan or 7(a) Small Loan programs; however, banks can be selective about the types of industries they work with, the number of startups they lend to, and the kind of business costs they cover. Because it is challenging for borrowers to find a bank that is a good fit for their specific franchise business, it is advisable to work with a lending consultant, like FranFund, who specializes in SBA loans for franchisees and can match you up to the right lender.
Can I get an SBA Express/Small Loan if I have bad credit?
As a small business owner, banks look at both your personal credit score (FICO) and your small business credit score (SBSS) to determine your creditworthiness. If your personal credit score is lower than 680, you will need a good explanation and good liquidity/income. The SBSS scores a small business by its likelihood of making payments on time. You will need an SBSS score of 165+. A past bankruptcy, short sale, or judgment is not an automatic disqualifier, as long as it is at least three years old and you have re-established clean credit (680+). You must not have any outstanding, open collections or past due student loans, unpaid child support or tax liens.
Is an equity injection (down payment) required for an SBA Express/Small Loan?
If you have a business that has been operating for more than two years and is successful than no cash injection is typically required. For startups, you can expect to contribute 10-20% of personal funds, meaning you cannot use borrowed funds such as a HELOC (home equity line of credit) or personal loan. Funds from a 401(k)/IRA rollover can be used to satisfy this requirement.
How is an SBA Express/Small Loan secured?
A lien on your business assets will be used to secure the loan. No personal collateral is needed, but a personal guaranty is required from each owner with 20% or more ownership of the business, as well as spouses (if their assets and/or income is needed to qualify). A personal guaranty is an individual’s legal promise to repay the debt.
What do I have to provide the bank to close an SBA Express/Small Loan?
The business should be revenue ready within 60 days from generating revenue, which means these items need to be complete:
- Training certificate (required by some lenders)
- Signed franchise agreement and SBA franchise addendum
- Signed lease agreement (if applicable) and the bank’s landlord consent waiver
- Business licenses/permits required by State/County
- Business insurance
- Proof of equity injection (down payment)
- If the business includes buildout, there will be additional requirements
How long does it take to get my money from an SBA Express/Small Loan?
If all closing requirements listed above are complete, you can expect to get your loan funded in 5-10 business days, allowing time for SBA document completion, bank review and approval, and final signatures on the closing docs.
401(k) Business Funding
Is the FranPlan rollover process legal?
Yes, this funding option has been in use for many years and is governed by the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC). Our Third Party Administration (TPA) team ensures that your plan maintains ongoing compliance with all regulations.
How does the FranPlan work?
The FranPlan is a proven capitalization solution that allows you to use an existing retirement account to fund your new business with no debt, no taxes, and no penalties. And with our exclusive SafetyNet Program, you can start the FranPlan business funding process risk and cost-free.
Is my accountant able to perform the Third Party Administration requirements?
Maybe. Some accounting firms also offer TPA services, but you should confirm they understand that your plan is a ROBS plan. We have found that not all TPA's will administer a ROBS plan. In addition, make sure your accountant understands the scope of the services required. Plan Administration is more than just filing the annual Form 5500; it entails keeping your plan document in compliance with changes in the law as well as tracking plan activity such as participant loans, distributions, contributions, etc. They would also be responsible for preparing the Form 5500 and Form 1099-R.
What happens to the 401(k) Plan if I sell my company?
The unique part of selling a company funded by the ROBS strategy is that proceeds from the sale of the company go into the retirement plan when distributed to shareholders. For more information, see Closing a Plan.
How do I change my billing method?
You can update your billing information by calling us at 817-730-4523 or by downloading our Billing Change Form and sending to us in one of the following ways:
Do I have to allow my employees to contribute to this plan?
Yes, your employees will be eligible to contribute and must be given that opportunity when they meet the eligibility requirements outlined in your plan document. You cannot prevent your employees from contributing once they meet the outlined requirements. Please keep in mind, this does not mean that employee contributions will be invested in your c-corporation stock.
When must employee contributions and loan payments be deposited into the Plan?
The regulations for plans with fewer than 100 participants require the deposit to be made by the earlier of two timeframes:
- As soon as the amounts withheld from payroll can reasonably be segregated from the company’s general assets, or
- DOL created a Safe Harbor standard for smaller plans (less than 100 participants) that states any deposits made within 7 business days of a pay date are considered timely even if the deposits could have been made earlier.
What is Form 5500?
An annual report of an Employee Benefit Plan is required to be filed with the Department of Labor and the Internal Revenue Service on an annual basis. The purpose of the filing is to report all activity for the plan year such as distributions, contributions, income, and fees.
What is a profit-sharing contribution?
An employer may make a profit-sharing contribution to the retirement plan on behalf of an eligible employee without the employee having to defer at all. Typically, profit-sharing contributions are subject to vesting as outlined in the Plan Document. Profit-sharing contributions are always at the employer’s discretion.
What is an employer match?
An employer may decide to make a contribution on behalf of their eligible employees that are deferring their own money to the 401(k). This type of contribution, if made, is limited to a certain percentage of salary, may have other restrictions, and is subject to vesting as outlined in the Plan Document.
What does it mean to be top heavy?
A retirement plan is deemed Top Heavy if more than 60% of the plan’s assets are attributable to Key Employees. The calculation in determining this ratio is made on the last day of the immediately preceding plan year.
What are key employee classifications?
An employee who at any time during the current plan year fits into any of the following classifications is considered to be a Key Employee:
- Officers earning more than $180,000 annually
- Any employee owning more than 5% of the company (The IRS attributes ownership of stock owned by the employee and his or her spouse, parents, children or grandchildren)
- Any employee owning more than 1% and earning over $150,000 annually (not indexed)
What is a wage deferral contribution?
Once eligible, an employee may choose to make a pre-tax contribution from their salary/wages to the 401(k). This is simply dollars that are removed from the employee’s paycheck on a pre-tax basis and deposited into their 401(k) account. These contributions are 100% vested.
What is a participant loan?
The IRS guidelines for participant loans are:
- The term of the loan cannot exceed more than 5 years
- You must charge a reasonable interest rate
- You must make loan payments at least quarterly
- You are limited to borrowing the lesser of $50,000 or one-half of your vested account balance
If a participant defaults on the loan, the entire unpaid balance becomes a taxable distribution.
What is a highly compensated employee?
Includes all employees who own more than 5% of the company during the prior or current year, as well as certain family members of those 5% owners. In addition, employees who earned more than $125,000 during the preceding year (indexed annually) are also considered Highly Compensated Employees.