Are you thinking about opening a franchise? Whether it’s a business you frequent often, or that’s in an intriguing industry with tons of potential for growth, you’ll have to pay a franchise fee and cover other startup-related costs to open the doors to your business. This amount could easily be five figures or more, depending on the company, which means you may need financing if you’re unable to cover the costs out of pocket. Luckily, there are funding solutions available to help get your business up and running.
What is Franchise Financing?
Franchise financing is a form of business funding that alleviates the pressure of having to dip into your savings to start a franchise. Instead, you can borrow the funds and use them to pay the franchise fee and any other expenses you’ll need to cover to bring your company to life.
Be mindful that you may be required to make a down payment to secure funding – often up to 30 percent of the amount you plan to invest in the company. However, it depends on the lender and financing arrangement.
Steps to Get Franchise Financing
When you’re ready to move forward, follow these steps to simplify the process of securing franchise financing.
1. Do Your Research
Reach out to the franchisor for recommendations on start-up financing. They’ll likely be able to advise you based on their experiences dealing with past franchisees or point you in the direction of lenders that could be a good fit.
2. Determine How Much You Need
Compile a list of expenses you’ll incur when starting the franchise. It’s not uncommon for franchisors to disclose cost estimates in educational documents provided to individuals interested in becoming franchisees with their company. Then, subtract the total amount you come up with from the cash you have on hand and available to invest in the business to come up with the amount you’ll need to borrow.
3. Assess Your Business Qualifications
The eligibility requirements vary by lender, but most will have a credit score, time in business and revenue guidelines. You’ll often find that there are also collateral requirements for franchise loans, which means you could lose your valuable assets if you’re unable to make timely payments.
4. Prepare a Business Plan
Many lenders will request a business plan, which is a formal document that includes key details about the business and its personnel and financial projections. Be sure to disclose how you plan to grow the business and how the funds you borrow will help lead to profitability and expansion.
5. Decide Your Type of Financing
Once you have a business plan handy, the next step is to decide how you’ll fund your franchise. Most small business owners turn to SBA loans, franchisor financing or alternative lenders. More on these options shortly.
6. Compare Lenders
Don’t settle for a financing offer from the first lender you apply with. Instead, obtain quotes from several lenders and compare them to find the most suitable option for your business.
7. Submit Your Application
Complete the loan application in its entirety. Be sure to gather any documentation the lender will need beforehand so you’ll have it readily available when it’s time to apply. You may have the option to apply online and upload the requested documents, but some lenders will require you to visit a physical branch to start the process.
Options for Franchise Financing
Most business owners turn to these funding sources to finance their franchise:
SBA Loans
These loan products are backed by the U.S. Small Business Administration and often come with competitive loan terms that are far better than you’d get with traditional banks and some credit unions. Plus, some lenders offer additional support to help launch your business and operate more efficiently to foster expansion.
There are three types of SBA loans to choose from:
- SBA 7(a) loans: You can use loan proceeds as short- or long-term working capital or to purchase supplies, furniture or fixtures. Some business owners also use 7(a) loans to refinance existing business debt, but restrictions may apply. SBA 7(a) loans are limited to $5 million.
- SBA 504 loans: Also capped at $5 million (or $5.5 million for select energy initiatives), SBA 504 loans are ideal for small business owners seeking funding to acquire major fixed assets, including long-term equipment, machinery and new facilities, to expand operations. You can also use the loan proceeds to purchase land or buildings.
- SBA microloans: The loan products are relatively flexible and cater to small businesses that are having trouble getting approved for funding elsewhere. Still, you can only borrow up to $50,000, which may not be enough capital to start a new franchise. Furthermore, you cannot use the funds to acquire real estate or make payments toward existing business debts.
Ideally, you want to explore 7(a) loans to fund your new franchise since they’re the best fit out of all SBA’s loan offerings.
Traditional Bank Loan
You can also apply for a commercial loan through most traditional banks or credit unions. You’ll typically need a strong credit score to be eligible for funding. The banker will also want to see a detailed business plan before considering your request.
Franchisor Financing
Select franchisors extend financing to aspiring franchisees. This is done by the parent company or through a lender in their network who has tailored solutions available to the company’s new franchisees.
Alternative Lenders
If an SBA loan, traditional bank loan or franchisor financing isn’t an option, consider an alternative lender to access the capital you need. This is usually how the process works:
- Step 1: Fill out an application for your chosen alternative lender.
- Step 2: Connect with their team member or business advisor to discuss your unique needs.
- Step 3: Evaluate financing offers if there’s a match.
- Step 4: Select the best funding opportunity for your new franchise and finalize the formal application process.
- Step 5: Receive the funds you need to move forward.
You could also explore other financing options that could be a good fit for your business which include:
- Small business loans: These loan products are available to small business owners with at least $5,000 in monthly gross earnings and three months in business. You could get approved for between $10,000 and $5 million with a six to 10-month term, and some borrowers receive loan proceeds the same day.
- Business lines of credit: You’ll usually need at least six months in business, a 600 FICO score and $5,000 or more in monthly gross sales to be eligible for a business line of credit. They come in two forms – unsecured (with no collateral requirement) or secured (backed by collateral).
- SBA Loans: If you have a credit score of at least 675, $60,000 in annual gross sales and three or more months in business, an SBA loan could be a good fit. You could access between $50,000 and $5 million for your small business and receive funding as soon as 45 days. With regard to repayment periods, you’ll get a loan term between 10 and 25 years.
- Asset-based loans: Secured by collateral, asset-based loans between $10,000 and $5 million with one to five-year terms are sometimes available the same day following approval. You’ll need $5,000 in monthly gross earnings and three or more months in business to be eligible for a loan, but there are no minimum FICO score requirements.
- Equipment financing: Purchase the equipment your new franchise needs to operate through equipment financing. Even if you haven’t opened the doors to your business or made any sales, you may qualify if your credit score is at least 580. Loan amounts between $10,000 and $5 million are available with funding times from two to five days. You can choose a repayment period between one and five years that best suits your company’s financial needs.
- Start-up funding: If you’re just starting out and don’t have any time in business or monthly sales, a start-up funding solution could be ideal. You’ll need a credit score of 650 or higher to be considered for a loan of up to $5 million with a loan term between one and five years.
