Personal Savings Surpass Loans and Other Sources Expected for Funding New Franchise Units
August 16, 2023 — With higher interest rates and tightening credit, aspiring franchise owners expect “personal sources” to make up the majority of funding for their business launches, cited among the top three sources by 51.2% of respondents in a July survey. Those planning to take advantage of bank loans and Small Business Administration loans stood at 36.8% and 31.6% respectively. Another 12.5% of respondents are hoping to take advantage of in-house financing by the franchisor from whom they are purchasing.
These results are consistent with data from March 2023, just as bank failures were making headlines and “personal savings” was the most often source selected, at 47.4% of respondents.
The category that grew most was “my retirement savings (401K or other)”, rising from 12.6% to 18.4% and taking fourth place. Comin g in fifth place was “credit cards”, growing from 12.6% to 17.1%
Home equity dropped the most as a category, from 17.9% to 10.5% of respondents, likely due to the increase in applicable interest rates.
These results are according to surveys of aspiring business owners conducted by FranchiseInsights.com in July 2023. The total percentages above add up to more than 100% since respondents were instructed to choose their top three sources.
The “other” option was chosen by 8.6% of respondents. The top “other” sources cited were as varied as “inheritance”, “employment income”, “grants”, “inherited IRA” and “sale of home,” among others.
Funding remains a top concern of aspiring franchisees, as 71.3% cite it as a key factor in their startups as recently as July 2023.
By aggregating sources into two buckets, we see that entrepreneurs are assuming that under half (43.6%) of startup capital sources will be from their own personal resources. The remaining 56.4% of sources will come from outside their balance sheets. “Other” sources were excluded from this view.
Personal Sources – for this analysis include personal savings, retirement funds (401K or IRA), credit cards, cash value insurance policies, and liquidation of securities. Though home equity lines of credit are technically a loan secured by the home, it was included for this analysis since it represents buyer equity.
Outside Sources – include Small Business Association (SBA) loans, banks or other loan providers, franchisor financing, venture capital, angel investors, and friends and family.
Undoubtedly higher interest rates are a key factor in the expected reliance on personal savings and sources of capital. Leverage to make a larger purchase and the tax deductibility of business interest go a long way to explain the popularity of debt among the top three sources of startup capital.
FranchiseInsights.com conducts a monthly “mystery shopping survey” as well as the Small Business Startup Sentiment Index™ (SSI) of individuals who have recently inquired about businesses for sale. The most recent Startup Sentiment Index™ surveys were conducted July 13-31, 2023. Responses related to financing were collected from both instruments.
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Published on Wednesday, August 16th, 2023.