Franchise Financing: Most Popular Financing Options for Small Businesses

Many congratulations on your decision to enter the franchise business! Let’s help you with how to finance your franchise. But before coming to finances, you must have weighed the pros and cons of owning a franchise business. Let us refresh them for you –

The upsides and downsides of buying a franchise

There are some disadvantages in owning a franchise –

  • You cannot function independently. The network controls many aspects like selling products or service or operation procedures.
  • Franchisors hold the renewing power – there might be a chance that your franchise won’t be renewed after the tenure.
  • You have to share your profits with the franchisor.
  • Your business reputation is linked with other franchisees in the network.

Despite the disadvantages, there are some practical advantages – 

  • The brand along with the products is already tested and established in the market.
  • You will get extensive support from the franchisor – even if you are a newcomer.
  • You can exchange ideas with other franchises, and even learn from their mistakes.
  • Arranging franchise funding will be easier than an independent business.
back to menu ↑

Costs of opening a franchise

The cost of owning a franchise will largely depend on the type of business you are getting into. The typical headings can be –

  • Establishment costs – Real estate, build or rent
  • Business licenses, franchise fees
  • Professional fees for attorney or accountant.
  • Setting up offices, equipment, or store, etc.
  • Hiring of personal, training, insurance, uniforms, etc.
  • Advertisement and promotional activities.

When you are open for business, there can be recurring expenses like –

  • Royalty fees to the franchisor – typically 4-8% of the gross revenue
  • Joint advertising and marketing fund – 2-4% of the gross revenue
  • Salaries and other professional fees
  • Supplies and stock
  • Rent, maintenance, and utility expenses.
back to menu ↑

What is a franchise loan?

A Business loan for a franchise can be any loan that provides you with the working capital for your franchise. This totally depends upon your assessment and requirement, and you should look for the lender offering closest to your needs.

back to menu ↑

Financing options to open a franchise

You really need not worry about ‘how to finance a franchise?’ There are numerous places offering a variety of financing options to suit most of your needs. These Includee:

  • Franchisor financing
  • Franchise Financing Companies
  • Commercial Banks Term Loans
  • SBA loans, and microloans from non-profits
  • Alternative Lenders that offer Term Loans, Business Line of Credit, Equipment Finance Loan and Invoice Financing and factoring
  • Other sources

Franchisor financing

If you are wondering ‘are there companies that give you start-up money to franchise?’, then franchisor financing is the easiest option for you. They offer a tailor-made solution as they know the scene better than any lender.  They can also offer fee waivers or a softer repayment term.

But a Franchisor financing would also mean regular repayment to the franchisor in addition to the royalty and other fees. It would also mean allowing the franchisor too much control of your business. Compare the franchisor’s terms with other options to find the one best suited to your needs.

Franchise financing company

Many financing companies specialize in funding franchises. They may lend directly or match borrowers with lenders or offer terms that are more customized towards running a franchise. Often, they have a tie-up with Franchisors to finance new ventures.

Commercial bank loans

Bank loans are one of the most common ways to finance your business. Most banks will offer loans but they require collateral. They also require a high credit rating for loan approval.

SBA loans

The US Small Business Administration (SBA) reduces the risk to the lenders by guaranteeing a portion of the loan amount. This motivates the lending partners to offer bigger amount with a lower interest rate and longer period.

There are no SBA franchise loans, but an SBA loan is certainly a coveted option for franchise funding.  But they have a strict eligibility criterion and the process is long. You should consider going for an SBA loan after careful scrutiny of your present state of financial state.

The Paycheck Protection Program (PPP) is a part of the CARES Act specifically designed to help small businesses tackle the economic crisis due to the COVID-19 pandemic. You have to use the loan to keep your workers in the payroll along with their insurances and benefits. You can also use the loan for meeting establishment expenses.

SBA will forgive the loan if you use the funds for the eligible expenses. You can apply through any lender that is participating in the SBA 7(a) program.

The Certified Development Company (CDC) /504 loans are specifically designed to provide growing businesses with long-term, fixed-rate financing for expenditure on fixed assets like real estate, construction, machinery, or equipment.

They typically have 10-20 years of maturity term and can be up to $1 million ($1.3 million for public policy goals) with a monthly repayment schedule.

Alternative lenders

Typically, alternative or online lenders are less stringent about their requirements and have a shorter approval time. They also offer a variety of financing options like business lines of credit, equipment financing, invoice factoring, and invoice financing along with term loans. But this convenience comes at a cost – they have higher interest rates than traditional loans with the stricter and shorter repayment schedules.

Here are some of the versatile options for funding your franchise –

Ondeck

OnDeck offers term loans as well as business lines of credit. Online or phone applications will typically take a few minutes and you will get the fund within 24 hours. They are less stringent about credit scores and also don’t require collateral. They offer discounts for repeat borrowers and can be a good option if you require fast cash.

However, their loans are expensive and they have a fixed repayment plan, without any benefit for early repayment.

Ondeck Review

A+ rating with BBB, 9.8/10 customer ratings at TrustPilot. Relaxed eligibility requirements and transparent Information for fast financing solutions

Apply NowRead Review

Kabbage

They stand for convenience and versatility. It is possible to apply for a Kabbage loan online and get the money within the same day. You also can have the money in your PayPal or bank account or Kabbage card. They offer a business line of credit and don’t require a minimum credit score from you, instead they look at your business revenue and cash flow. It is a good option if you have a low personal credit score. Be aware of the high annual percentage rate though.

Kabbage Reviews

Small business funding options that fit your business. Qualify in 10 minutes for up to $250,000 line of credit

Apply NowRead Review

Funding Circle

They can offer both secured and unsecured loans for your franchise. They are a peer-to-peer (P2P) lending platform where your business is backed up by a community of thousands of people. They offer term loans for small businesses in the range of $25,000 to $500,000, for a period of up to 10 years. You can also avail of the SBA PPP loan through them.

Smartbiz

This is another great option for funding small businesses and your franchise. Along with all types of SBA loans they also offer term loans for shorter durations to allow you more flexibility. The other funding options for you are business lines of credit, invoice financing, and business credit cards.

Do it yourself

Arranging finance for your franchise can also depend on you – like a DIY procedure. Following are certain ways and manners you can arrange finance for your franchise.

Crowdfunding

This is an innovative way to raise funds for your franchise. Promote your product or service on your personal page in the social media with an appeal for monitory contribution or fundraising. You don’t have to pay back the contributors but usually, there is a return gift like a free product or a hefty discount.

You can also go through websites which host crowdfunding, or you can also approach organizations specializing in crowdfunding for a fee.

If you are wondering how to finance a franchise with no money, then crowdfunding is a great option. This also works if you want to bypass the traditional finance application procedure.

Business partner or investor

A partnership is also a simple and time-tested option for financing. You can choose a sleeping partner or share responsibilities but be clear about each other’s role before you sign on the dotted line. The disadvantage is that you have to share profits as well as control of your franchise.

Women entrepreneurs

Many non-profit organizations offer grants specially meant for business start-ups owned by women. These grants often come without any interest or repayment terms. Before you think it’s free money, understand that they come with quite a few caveats. Qualifying for these grants can be really tough and you cannot use the grant money for anything other than the proposed business. You also need to have a solid business plan which aligns with the principles of the organization.

Veterans

S.B.A has a Veterans Advantage program, offering veterans and other eligible servicemen loans of up to $350,000. There are also substantial fee reductions on major SBA loan programs for business owners with at least 51% ownership of the business.

Minorities

If you belong to a minority community or are planning a business that will serve a minority community then you can access funds for your franchise through non-profit and community-based organizations.

Friends and family loan

This is one of the most common ways to fund your franchise. This sounds hassle-free and informal but you should be clear about the contribution and role of the stakeholders. It is better to put it down legally as you don’t want a strain in your personal relationships.

Home equity

You have an option to take out a second mortgage on your home or a home-equity line of credit, to finance your franchise. But you should be careful and use this option as the last resort as your loan is secured by your home and if you can’t repay you might lose it.

Retirement funds

If you have some money in an IRA or retirement fund, then you can use that amount to finance your franchise. You have to pay taxes on the amount used and also suffer the loss of income, but this can be a useful fund. It is advisable that you don’t use the whole of it as it is your life’s savings.

back to menu ↑

How to apply for Franchise Financing?

There are certain steps you need to take before applying for your franchising loan.

  • Get your papers in order – Lenders appreciate proper paperwork. They would typically require statements of your personal finances or financial papers of any other business you own along with the franchise agreement.
  • Prepare a business plan – Most lenders want to be clear about how you are going to manage the business. A proper business plan with clear road maps stating your plan will definitely help the approval process.
  • Shop around – It’s beneficial if you talk to different sources and lenders for your financing needs. You might get a more favorable term and also diversify your financing sources to reduce risk.
back to menu ↑

How can you use your franchise finance?

The price of a franchise may have quite a few latent costs and they are only visible as you start running the business.

You need to list your assets and liabilities to understand how much money you can put in the business in case of emergencies. Do your research to understand how much finance you actually require and prioritize the expenses you plan to meet through the franchise loans.

back to menu ↑

What is the Difference Between Franchise Financing and a Small Business Loan?

If you are asking ‘Can you take out a business loan for a franchise?’ the answer would be yes – but with a few hitches! A general business loan might have a stricter repayment schedule which might put economic stress on a franchise that has just opened.

On the other hand, some franchise financing options cater to situations unique to franchises. They may also offer franchisor discounts on fees and a more flexible repayment structure.

back to menu ↑

Final Thoughts

There are numerous ways to finance your dream franchise, but you must know what you need. It will be helpful if you spend some time researching and talking to people. It does not matter if you don’t get it all perfect at the first chance. Having a franchise as your first business will cushion your fall and also can serve as the springboard to launch

Bizit
Logo