Do you dream of owning your own franchise? Covering the costs out of pocket can be a heavy lift and drain your savings. That’s where franchise financing comes in – it’s a viable option to help fund your dreams and get your new franchise up and running.
Most Common Franchise Financing Questions
Before you begin your search for the perfect loan, here’s what you should know about franchise financing and how it works.
1. What is Franchise Financing?
As the name suggests, franchise financing is a form of funding that helps small business owners, or franchisees, cover franchise fees and other related expenses. The purpose of franchise financing is to alleviate the added stress that comes with covering all the startup costs out of pocket.
2. How Does Franchise Financing Work?
Instead of draining your savings to open the doors to your new business or expand current operations, you can borrow a portion of the funds. You’ll get the loan proceeds in a lump sum and repay over time.
When you’re ready to secure a loan, here’s what to do:
- Step 1: Reach out to the franchisor directly to inquire about financing options. They may offer an in-house solution or refer you to lenders they partner with to provide financing to franchisees.
- Step 2: Check your credit. Get copies of your credit reports from the three major credit bureaus – Experian, TransUnion and Equifax – and confirm the contents are accurate. If you notice any issues, file disputes promptly with the appropriate credit reporting agency to rectify errors that could be dragging your credit score down. You also want to check your credit score before applying so that you have an idea of where you stand and avoid any surprises.
- Step 3: Research lenders and inquire about eligibility criteria. Beyond a solid credit rating, most require a downpayment and some form of collateral to secure the loan. It’s also likely you’ll need a business plan that communicates your strategy to grow the business and make it profitable.
- Step 4: Get loan quotes from several lenders. Compare the loan amounts, interest rates, terms and fees to determine which deal is most suitable for your financial situation.
- Step 5: Apply for a loan. Be sure to complete the application in its entirety and review for any errors or omissions that could result in an inadvertent denial. It’s equally important to submit any required documentation to the lender in a timely manner to avoid delays in the processing of your loan application.
3. Who Can Get Franchise Financing?
You’ll generally need a positive net worth – which means your assets exceed debts – and a certain amount of liquid assets to qualify for franchise financing. Be prepared to provide proof of your net worth and liquid assets to the lender, as they’ll want to confirm you have the means to keep operations afloat and cover personal expenses while the business is in its beginning stages and isn’t yet turning a profit.
4. What are Your Franchise Financing Options?
There are several ways to finance a franchise, including:
- Franchisor financing: Some franchisors offer funding directly to franchisees. You may also find that they work with preferred lenders to help franchisees secure the funding they need to get started.
- Traditional bank loans: You’ll need a solid credit rating and a detailed business plan to qualify for a traditional bank loan.
- Online loans: These loan products typically have flexible guidelines and offer fast approvals and funding times. However, the borrowing costs and loan terms are often less favorable than you’ll find with traditional bank loans.
- SBA 7(a) loans: Backed by the U.S. Small Business Business Administration, SBA 7(a) loans offer competitive interest rates and extended loan terms. You can borrow up to $5 million through an SBA-approved lender to open a franchise. The downside is it often takes a month or more to receive a lending decision, and funding timelines are also rather lengthy.
- Crowdfunding: If you’re unable to qualify for a small business loan, crowdfunding or raising money online via donations from strangers is also an option. Most donors will want a share of the company’s equity or another item of value in return.
- Loans from relatives and friends: You should only use this option as a last resort to avoid compromising valuable relationships if the new business venture doesn’t quite work out and you’re unable to repay what you borrow.
- ROBS: Also known as Rollovers for Business Startups, ROBS lets you withdraw funds from your 401(k) or other retirement accounts to fund your new franchise without subjecting yourself to hefty penalties from the IRS.
5. How To Determine Which Financing Is Right for You?
Before applying for franchise financing, consider the following:
- How much are you looking to borrow?
- Have you prepared a business plan that includes financial projections?
- Is it sufficient to cover expenses until your business is profitable?
- What types of loan options are available, and are they the best for your financial situation and credit health?
Ultimately, the loan offer you select should come with competitive terms and have payments that are affordable and won’t stretch your budget too thin or lead to cash flow problems.
6. What are the Requirements for Franchise Financing?
It varies by the lender and form of financing you select. Here are some general guidelines to keep in mind as you shop around for funding opportunities:
- Credit history: Some online lenders offer franchise financing if you have a credit score of at least 600, but you’ll need a 640 or higher to qualify for an SBA loan. A traditional lender, like a bank or credit union, often requires a score of at least 700 to be considered for a loan.
- Documentation requirements: Prepare to hand over a copy of your government-issued identification card along with a copy of your business license, permits, operating documents (if applicable) and resume.
- Business plan: You’ll likely need a detailed business plan if applying with a bank or credit union. However, a one-sheeter may be enough for an online lender.
The lender will also inquire about the industry you operate in and how long you’ve been in business. If you haven’t yet opened the doors to your business, you’ll need to indicate that on the application.
7. Where Can You Get Franchise Financing?
A quick online search for franchising financing can be overwhelming, considering there are so many options available. However, an online platform can simplify the process by providing tailored lending solutions in minutes and offering personalized assistance every step of the way.
