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By Benetrends • January 12, 2014

Funding a Franchise: Why Crowdfunding is Not Your Best Option

Funding a Franchise: Why Crowdfunding is Not Your Best Option

By: Dallas Kerley, President and CEO

Crowdfunding has been a growing buzzword among entrepreneurs for several years. In fact, platforms like Kickstarter continue to gain media attention — especially with recent successes such as the Reading Rainbow campaign that quickly went viral. 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), and securities-backed lines of credit are still a better option in most cases for franchisees. Contact one of our funding experts at 866.423.6387 to discuss the best options for your business.