Franchise Financing & Loans

What Is Franchise Financing?

Franchise loans assist franchisees in obtaining the funds they require to meet beginning costs such as business fees, securing a location, and purchasing equipment and inventory for a new franchise. Despite franchises being based on a well-known brand, franchisees are frequently expected to bear significant upfront expenditures when starting.

While no specialized loans exist for franchisees, some loans and financing solutions may be more advantageous than others. Because of the existing brand’s proven business plan, franchise owners may find it easier to secure a business loan or funding than a small independent firm. Some of the greatest franchise finance and loan choices are listed below.

Best Types of Franchise Financing

1. Franchisor Financing

If your franchisor offers franchisee financing, this is a wonderful way to cover those upfront fees for various reasons. First and foremost, if your franchisor provides finance, the loan packages are almost certainly tailored to your firm. In addition, funds for equipment or fees may be available through franchisor financing programs.

Perhaps most crucially, while every lender wants your business to succeed, your franchisor has a special incentive to see that it does. As a result, you may never need to hunt for company finance if you collaborate with your franchisor to acquire financing.

2. Commercial Bank Loans

Another option for financing a franchise is to take out a conventional company loan. Applying for a company loan might take a long time, but banks are more likely to accept franchise-related loans because franchisees have a reduced chance of failure. In addition, a local bank or credit union might be able to offer you better interest rates and unique benefits. On the other hand, a bank loan is not the best alternative if you need money immediately to launch your new franchise.

3. SBA Loans

SBA loans can be utilized to purchase a franchise in some cases. For example, the Small Business Administration has authorized a variety of franchises as qualifying for 7(a) loans. A 7(a) loan can be utilized for company expenses, including franchise fees, equipment, inventory purchases, and staff recruiting. A CDC/504 loan is another option to explore for significant investments such as real estate or costly pieces of equipment.

Franchise firms can benefit from SBA loans, but the SBA has specific loan standards that you may or may not be able to meet. Furthermore, receiving money can take a lengthy period, up to many months. If you need cash right away, you might want to look for a business loan somewhere else.

4. Alternative Loans

Alternative financing might assist you in funding your franchise swiftly and without the hassles associated with traditional lenders. Alternative lenders may have fewer restrictions and be able to give funds in a matter of days rather than weeks or months. An unsecured term loan, such as a working capital loan, or secured finance, such as an equipment loan, may be available. In addition, a more flexible kind of financing, such as a merchant cash advance or a line of credit, may be available.

Alternative lenders have the disadvantage of having higher interest rates or shorter payback durations. On the other hand, alternative loans may be the ideal option if access to finance is the only thing standing between you and an excellent business opportunity.

5. Equipment Loans

Equipment loans can be a terrific solution if purchasing pricey equipment is your biggest business hurdle. Equipment loans are available for everything from an espresso machine to a computer to a tractor, and the equipment itself serves as collateral. In addition, because equipment loans are secured, they may be easier to obtain if your credit history or cash flow is less than ideal.

6. Personal Loans from Family & Friends

Family and friends may be willing to lend you money to help you start your new business. While a loan from a friend or family member can usually be used for various commercial purposes, the danger to your relationships is considerably more significant than with a company loan. Therefore, draw up a contract with payback terms to protect your personal ties even if the loan is informal.

How to Start a Franchise with No Money

While many new businesses, particularly startups, may find it challenging to obtain business loans, lenders may be more accommodating for franchise loans. In addition, because franchisees have a lesser chance of failure, specific lenders may be more helpful when issuing loans.

The quality of your franchise will have a significant impact on your chances of securing a loan. More extensive, well-known franchises are more likely to get accepted, whereas smaller, younger franchises may face more significant challenges. Large franchises with national or worldwide brand recognition, on the other hand, are prohibitively expensive to join.

Many franchise loans need collateral, but your company’s location and equipment can often help meet that requirement. However, a lender may ask an applicant to furnish additional collateral in certain instances.

Although lenders may be more ready to grant a franchise loan, this does not mean that franchise loans are simple to obtain. Many lenders place a high value on a borrower’s credit score. Many lenders will not authorize a loan for someone with a credit score of less than 650. Even if you have decent credit, you’ll need to be able to put down a significant amount of money. Most lenders will require you to put down at least 20% of the purchase price.

In other words, lenders are more inclined to make small business loans to new franchises than to new small businesses. You’ll need some money and strong credit history to start a bank loan, credit union loan, or internet finance. A friend or family member loan may be the greatest alternative if you have no money.

Applying for Franchise Financing

Each franchise is unique in its own way. While some franchises let their franchisees to seek loans on their own, several have formed agreements with lenders or directly give financing to their franchisees. If the franchise company you’re working with can recommend a lender, their current relationship with that lender may help you get accepted or get better loan conditions.

Because standard business loans can be used for franchises, lenders will want to see much of the same information as if you were applying for a loan for a company you established from scratch. Therefore, be prepared to offer extensive company information on your loan application as the borrower, such as:

• Your business plan
• Your credit score and credit history
• Copies of your personal financial records and tax returns
• Your resume, as well as resumes for any partners you may have

If you already own and operate a franchise, the lender will undoubtedly want to know how things are doing. You may be asked to supply financial records from your company, such as a cash flow statement or quarterly tax returns.

You should have received a Franchise Disclosure Document (FDD) before officially agreeing to become a franchisee, which contains thorough information on your chosen franchise’s performance history. Again, this is something that lenders will demand to see.