⚡ Get All Content for 20% Off ⚡

Starting a Franchise But Need Financing? Here's What to Do. Getting capital is no easy feat, especially for first-time franchisees.

By Lissa Harris

entrepreneur daily

This story appears in the May 2018 issue of Entrepreneur. Subscribe »

StockFinland | Getty Images

In theory, getting a loan for a franchise business should be easier than financing a new startup. You have brand recognition, a proven track record and hard data on your side. But even when armed with franchise facts and figures, convincing someone to lend you north of $350,000 -- the typical loan amount for a franchise startup -- is an intense process.

Related: 5 Affordable Franchises You Can Start for Less Than $10,000

"Most of these people are getting into business for the first time, and this can be a scary process," says Anthony Byrd, director of business development at DCV Franchise Group, a California-based advisory firm that helps secure Small Business Administration (SBA) loans and serves as matchmaker between banks, franchise
systems and business owners. "We're the last piece of the puzzle that allows an entrepreneur's dreams to come true," he says.

There's a lot to know about securing a loan. SBA loans, for example, are guaranteed by the federal government and come with low interest rates, but they're not easy to come by. Banks want a wealth of info on your personal finances, credit history and collateral, which Byrd says often catches applicants by surprise. If you're a new franchisee and in need of cash, here's his advice (whether or not you hire an advisory firm).

Related: The 7 Cheapest Franchises on the Entrepreneur Franchise 500 List

1. Get help finding a lender.

Many franchisors have a relationship with a funding partner like DCV that can help new franchisees get prequalified for a loan. If they don't, it's a potential red flag for franchisees, Byrd says. (If you want more options, the International Franchise Association hosts an online directory of approved financial services companies.) Even if you already have a good relationship with a lender, expert advice never hurt anyone. Byrd recalls one client whose local credit union offered a nice-sounding loan -- but the payments would have been sky-high. "She would've been so underwater, it's not even funny."

2. Target your pitch.

"Every bank is looking for a different type of borrower and a different type of franchise concept," Byrd says. For example, he's found that one well-known national bank prefers service- or fitness-industry concepts over food-related startups. Entrepreneurs who know this (or learn it from a finance consultant) can spare themselves a lot of time schlepping from bank to bank.

3. Build your case with data.

Your franchisor can -- and should -- provide data on how businesses like the one you're trying to open have performed. When making the case to a lender, data can be critical: Byrd says he sometimes encounters loan officers who make knee-jerk denials on franchise loans based on their own perception of the brand. The quickest way to overcome that bias is with numbers.

Related: 5 Affordable Restaurant Franchises You Can Start for 5 Figures

4. Be patient.

Many franchisees aspire to own multiple units -- and in fact, of every 10 franchise agreements Byrd sees, about seven are multi-unit. But banks generally aren't comfortable lending a new franchisee money for multiple businesses at the same time. They want to make sure you can run one unit successfully for at least six months first. "Learn your business, understand it and then come back and get the funding for that second unit," Byrd says.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

The Remote Side Hustle a 43-Year-Old Musician Works on for 1 Hour a Day Earns Nearly $3,000 a Month: 'All From the Comfort of Home'

Sam Ziegler wanted to supplement his income as a professional drummer — then his tech skills and desire to help people came together.

Business News

Costco CFO Reveals Uncertain Fate of $1.50 Hot Dog and Soda Combo

CFO Richard Galanti reveals that the price will stay the same — but only "for a while."

Business News

The Most Unexpectedly Popular Side Hustle of the Decade Has Low Startup Costs and High Markups

A new report shows that vending machines are a popular investment — and the industry is set to grow up to $3 billion by 2031.

Marketing

Ever Wonder Why Certain Websites Rank Higher Than Yours? This SEO Expert Reveals The Secret to Dominating Search Results

It's often the smart use of SEO, now supercharged with AI, particularly in keyword optimization.

Business News

AI Is Impacting Jobs. Here Are the Gigs Affected the Most, According to an Analysis of 5 Million Upwork Postings

The researcher said in the report that freelance jobs were analyzed first because that market will likely see AI's immediate impact.

Leadership

Former Interrogator Shares 5 Behaviors Liars Exhibit and How to Handle Them

Five deceptive behaviors to look for and how to respond to those behaviors when you encounter them.