The 6 Best Financing Options for Franchising a Business
Offering both the flexibility and independence of being a small business owner, plus the support and infrastructure of a large corporation, a franchise can be the ideal opportunity for anyone interested in becoming an entrepreneur.
Even so, opening a franchise requires a significant investment of capital -- often including a hefty franchise fee along with ongoing royalties and advertising costs. Not everyone has access to that kind of cash. So, if you need a business loan to fund your franchise investment, you might find it challenging to navigate the various options available.
Let’s simplify the process of financing your franchise business by breaking down the six most popular franchise financing options.
1. Franchisor financing.
If you need funding to purchase a franchise, your first conversation should be directly with your prospective franchisor.
Many corporations with franchise business models offer tailored financing solutions exclusively designed for their franchisees, either through partnerships with specific lenders or by providing capital directly from the corporation. This is one of the most common ways to finance a franchise and offers many benefits. Gold’s Gym, UPS Store and Meineke all offer financing options to their franchise owners.
One benefit of using franchisor financing is that it becomes a one-stop shop for everything you need. Many of these programs offer financing not only for the franchise fees but also to purchase equipment and other resources you need to start up the business.
If you’re working with a franchisor who offers their own financing program, chances are you won’t need to look much further for funding. After all, who knows the business better than the franchisor? They know the risks you’re taking on and the ins and outs of the business better than any other lender ever could.
Each franchisor financing agreement will differ, but some offer to take on as much as 75 percent of the debt burden from the new franchise owner. Agreements might involve deferred payments while the business is starting up, or they may structure repayment on a sliding scale. Have your independent business attorney or accountant review the terms of both your franchise agreement and the financing agreement to help you understand the full terms before you sign.
2. Commercial bank loans.
Another common way of financing your franchise is through a traditional term loan from a bank. A term loan is what most people think of when they think of any form of loan financing, especially if you’ve ever taken out a student loan or home mortgage. Under this model, a bank or alternative lender offers you a lump sum of cash up front, which you then repay, plus interest, in monthly installments over a set period of time.
When you apply for a commercial bank loan to purchase a franchise, your lender will want to review your business plan and personal credit history. The lender will use these documents to assess your creditworthiness. Essentially, through this process, the bank is trying to determine whether or not you can reasonably afford to repay the loan you’re requesting, and thereby how likely they are to get their money back.
Overall, you can assume that the stronger your financial history and the higher your credit score, the better the terms and interest rate will be for your term loan to finance a franchise.
3. SBA loans.
Of all the loan products on the market, one of the most desirable option for aspiring franchisees tends to be the SBA loan. SBA loans are loans partially backed by the U.S. Small Business Administration and funded by their intermediary lending partners.
Effectively, these loans follow a very similar model to traditional term loans from a bank or alternative lender. However, because the SBA reduces the risk to lenders by guaranteeing a portion of the loan amount, lenders are incentivized to offer more loans with lower interest rates and longer repayment terms than they otherwise would.
The SBA loan is certainly a desirable option for financing a franchise, so if you have the financial chops and credit score to be eligible, you should absolutely apply. That said, keep in mind that qualification standards can be stringent, and the application process is a long one. It’s worth carefully considering your chances of being approved for an SBA loan before you spend significant time pursuing a financing option that may be unreachable for the current stage of your franchise.
4. Alternative lenders.
If you need money to fund your franchise quickly or want to secure additional capital to supplement your commercial or SBA loan, you may want to consider applying for franchise lending through an alternative lender.
Typically, alternative lenders have less stringent requirements and shorter turnarounds than traditional financing options. They offer a variety of loan options like equipment financing, business lines of credit and even term loans. That said, this access and convenience may cost you. Alternative loan products tend to be more expensive, offer shorter repayment terms and lower loan amounts than their more traditional counterparts. However, it may be worth it if you need to supplement your existing financing, can’t qualify for a bank or SBA loan or need cash quickly to jump on a life-changing opportunity.
If franchise financing isn’t available and bank, SBA, or alternative loans don’t pan out, obtaining financing for your franchise may require some creativity. One of the newer and more creative ways of financing a franchise is through crowdfunding.
You might choose to set up and promote your own personal crowdfunding page or look towards specific organizations that crowdfund for businesses and franchises. There are also websites that crowdfund for specific industries and business types, which they then lend those funds to people in need of financing.
Crowdfunding is a great option if you have a blemish or two in your financial history and aren’t satisfied with the loan products and interest rates for which you qualify.
6. Friends and family loan.
Believe it or not, one of the most common ways to finance a franchise is by borrowing from your friends and family.
Whether you choose to borrow money outright, ask for a gift, or bring a friend or family member on as your business partner, these types of loans generally come at a very good price. That being said, some come at the cost of lost friendships and family disagreements.
If you do choose to take a loan from a friend or family member, be sure to write up a contract that includes repayment terms and expectations. If everyone understands the agreement before signing, breakups and disagreements will be less likely later on.
Becoming the owner of a franchise is a wonderful opportunity to get your feet wet as an entrepreneur. You get to try your hand as a business owner with the safety net of a large corporation behind you. With these financing options in your back pocket, you’ll be ready to get your franchise up and running in hardly any time at all.