How will you finance your franchise purchase? The family home is often used as collateral…but should you mortgage it to take on a business?
Many people borrow money against their home in order to buy a franchise. However, there’s always the possibility that you may not be able to keep up the payments. This means you could end up having to sell your home. Which is why you should think through the consequences of using your family home as collateral … and consider the alternatives.
What are the pros and cons of this action?
Before you dash off to take out a loan secured against your house, I recommend you take a step back and consider the pros and cons.
First let’s look at some pros to mortgaging your home to buy a franchise
The big one is that mortgaging your house will help you get into business. You can’t start a franchise without putting in some of your own money. So, unless you have cash savings, or shares or property you can sell, you will need to unlock some of the money you’ve invested in buying your house.
Apart from this, a loan secured against your home is generally the cheapest form of borrowing. Not only are the interest rates low (compared with, say, credit card debt) but the interest is often tax deductible in the business.
And now some cons to mortgaging your home to buy a franchise
Loan repayments will add to the cost of operating the franchise. You’ll have loan repayments to make each month, which means the business must be able to cover these from its revenue. On top of this. you won’t have the option of not paying them if sales are not as good as you hope for.
Also, you might be left with a debt once you leave the franchise. Say you increase your mortgage by $200,000 but you only repay $100,000 before you leave the franchise. You have more mortgage debt than you started with, but no business income to finance this extra loan.
How much is your home at risk if you mortgage it to raise funds for a franchise?
Most people understand that if you can’t afford your mortgage payments you may have to sell your home in order to repay the loan. It’s no different whether you are an employee or a business owner.
However, there’s an added twist for a business owner.
If you lose your job, your first option is to find another one so you can keep paying the mortgage.
But when you own a franchise you can’t simply go out and get another job. First you must exit the franchise – usually by selling it. After this you’ll need to find a job that provides sufficient income to pay the mortgage. It can be a long process.
So, if you can’t afford your mortgage payments and own a franchise, you may well have to sell your home in order to reduce the financial burden. Your home is definitely at risk!
What’s the alternative to mortgaging your home to buy a franchise?
Mortgage finance isn’t the only way to fund your franchise. There are several alternative sources of finance which can be combined to fund the business purchase.
Here are four sources of finance for a business:
- Cash. By this I mean money you have saved (like when you saved for a deposit for a house).
- Money from a family member.
- Asset finance. Several finance companies will provide finance to lease equipment or franchise fitouts.
- A small unsecured loan or a credit card.
Given the risks associated with mortgage finance, a blended approach may be a good one for you. Which is why it pays to get good, impartial advice on how to find your franchise.