Crowdfunding has been a growing buzzword among entrepreneurs for several years.
With all the hype around such hugely successfully campaigns that have raised millions of dollars in a short amount of time, it’s worth asking the question: Is it right for franchisees?
Lending experts do not recommend using crowdfunding to finance a business, especially for first-time franchisees. When reviewing applications, franchisors want candidates with the financial resources needed for long-term success.
If a franchisee is relying on a funding platform that collects donations from hundreds, or even thousands, of strangers, a franchisor will assume the candidate is undercapitalized and less likely to succeed.
Additionally, many crowdfunding users — both entrepreneurs and investors — neglect to fully understand the legal ramifications prior to starting or contributing to a campaign. For example, in the case of Kickstarter, funds raised are considered income and may be taxed.
Additionally, if a business fails, investors may pressure franchise owners to repay them a portion, if not all, of their investment.
That’s why funding options such as Small Business Administration loans, 401(k)/IRA financing (also known as Rollovers as Business Start-Ups or ROBS), and securities-backed lines of credit are still a better option in most cases for franchisees.
Schedule a consultation with Benetrends to learn more about our comprehensive suite of funding options for small business owners.