It can be daunting navigating the options for financing a Franchise. Particularly as there are so many options to choose from. 

You want to make sure you ‘get it right’ but aren’t sure which way to go or even what is available.

But with research and planning, you can confidently choose the best loan for your purposes and move ahead with purchasing the franchise you dream of.

Franchises provide lower risk and more support and infrastructure than stand-alone businesses. Perfect for new and experienced business owners alike.

With this guide, you will learn how to finance a franchise, see the financing options available, the kind of documentation lenders will require, and franchise purchasing incentives worth looking into.

How Much Can I Borrow for a Franchise?

How much you can borrow will be determined by many factors and the type of finance you choose. Before deciding on the kind of finance you need, it’s best to clarify your financial situation, goals, intentions for your new business, and the lifestyle it will create for you.

Assess the following things (preferably on paper) to get a realistic picture:

● Your net worth

● Your personal credit score

● Your business credit score

● How much cash you want to invest and how much to save in reserve 

● The kind of lifestyle you would like to create

● What you want out of the franchise -not just monetarily  

● Total cost of the Franchise

● Franchise related costs:

      ○ Location costs (mortgage/rent)

      ○ Leasehold improvements

      ○ Royalty fees

      ○ Inventory costs

      ○ Employees and training

      ○ Marketing/Signage

      ○ Equipment

Going through this process will give you a better idea of what you can afford and the scope of the investment you can make. Franchises can be highly affordable or significant investments. Knowing how much you would like to, and can, invest is the first step in the process.

How to Finance a Franchise: Types of Loans Available

Having a clear view of how much you need to borrow makes choosing your funding more straightforward. When you have an idea of the amount you would like to borrow and your overall financial picture, it’s time to look at the ways you can finance your franchise:

Commercial bank loans

The most common way to get funds for a franchise is with a business loan through a commercial bank. Usually, they provide the most competitive interest rates and terms and a reasonably predictable application process across the board. In addition, they are flexible in that they can be tailored for purpose.

Types of loans you can consider to fund your Franchise business:

● Traditional business loan

● Small business loan

● Business line of credit

● Commercial real estate loan

● Home equity loan

● Equipment Finance

● Small business credit card

SBA Loans: US Small Business Administration Backed Loans

A top option to finance your franchise is an SBA-backed loan. These loans follow guidelines set by the SBA that reduce lender risk and make it easier for small businesses to obtain funding. They are also available to borrowers who may not be eligible for traditional loans.

To use an sba loan for franchise funding, the Franchise you wish to purchase must be listed in their directory for eligibility for one of these loans. You can check the SBA finance directory here.

The SBA also has a lender match service to help you find SBA backed lenders in your area. Types of SBA loans:

● SBA 7(a) loan

○ This is the most common type of loan, which offers an amount of up to $5 million—used for refinancing current business debt, for short and long-term working capital and to purchase furniture, fixtures and supplies. They do not, however, fund ongoing franchise or royalty fees. The lender sets the Interest rates, but they are capped by the SBA.

● SBA CDC/504 loan

○ 504 loans are limited to the purchase of ‘major fixed assets that promote business growth and job creation’. Meaning you can use them for the

purchase or modernization and improvement of property.

● Microloan

      ○ Microloans offer loans of up to $50,000 to ‘rebuild, re-open, repair,      enhance, or improve your small business’. Borrowers cannot use them to purchase real estate or refinance existing loans. However, they can be used for things like inventory, furniture, supplies, equipment, working capital, equipment and machinery.

Internal Franchise Financing/Preferred Franchise Lenders

There are many franchises that offer financing. The main benefit of being funded by the Franchisor, or one of their preferred lenders, is the convenience of having everything in one place and tailored precisely to your needs. It is a common way of funding a franchise, and many franchisors offer this.

It is always worth checking if the franchise you are looking into offers financing or can refer you to one of their preferred lenders.

Securities-Backed Line of Credit

SBLOCs allow you to use your investment account, mutual funds, bonds, money market funds or EFTs as collateral for a revolving line of credit. Meaning you don’t have to sell your investments to borrow. 

They are non-purpose loans, meaning they don’t specify how you have to use them, making them more flexible. It is important to approach SBLOCs thoughtfully, as any shift in the value of your investments will affect your collateral value.

Alternative lenders

Alternative lenders offer loans to people who don’t qualify for a traditional bank loan or an SBA loan or need a quicker and simpler application process. However, these characteristically have higher interest rates and less competitive terms.

Alternative lenders who offer franchise finance:

● Apple Pie Capital (works exclusively with franchise loans)

● Funding Circle

● Can Capital

Microloans

Smaller loans under $50,000, microloans are more affordable and accessible. Typically they help underserved or disadvantaged entrepreneurs finance their businesses. The SBA, peer-to-peer lenders and non-profit organizations all offer microloans.

Borrowers can use them for things like paying for equipment, start-up funding, working capital, leasing commercial space and hiring employees.

Portfolio Loans

Portfolio loans are loans the lender does not pass on to the secondary mortgage market. What this means for you is that they can be easier to obtain for the self-employed who may have fluctuating income, offer more flexible terms, and be an option for those with a bad credit score.

Many of these lenders have a connection to the local area, so they can be a good option for real estate and local business purchases. They can, however, come with higher fees and interest rates.

Unsecured Loans

Unsecured loans are available to borrowers with high creditworthiness. They do not take collateral but may ask for a personal guarantee instead. As a result, they keep your assets freed up, may have fewer upfront fees but be harder to find, have smaller loan amounts and have higher interest rates than other loans.

Merchant cash advance

Merchant cash advances are unsecured cash advances repaid through a percentage of card sales every day, week or month. Therefore as revenue increases, repayments increase. Best to cover short-term business expenses or cash flow shortages. While convenient and flexible, they can be costly.

Other ways of gaining finance:

● Crowdfunding

● Friends and family loan

● Small business grants

● Personal savings

● Savings and Investment Portfolios

● Severance Package

Information Lenders may Require for Finance Application

All institutions are different and require different documentation depending on the type of finance you are applying for. Having your up-to-date documents in order will help the process go faster and more efficiently, allow you to apply to multiple sources more easily, seize opportunities as they arise, and give you a professional image right off the bat.

Have the following documents and information at your fingertips to be prepared:

● Your Business plan

● Initial investment figures (all in costs)

● Ongoing Franchise related costs

● Projected financial statements

● Signed Franchise agreement (if you have one)

● Business lease (if you have one)

● Members of your management team

● Personal credit report (and that of any business partner you are applying with) 

● Business credit report (if you have an existing business)

● Personal and business financial statements

● Proof of ownership of assets involved

● Tax Returns

● Business licence/permit

● Your ID

● Your resume, to assess your business acumen/skills

● Your existing debts, including credit cards and all loans

● Last 3 months' payslips

● Proof of downpayment (if a downpayment is necessary)

Too Daunting? Help With Finding and Financing a Franchise

Doing your research and being prepared will help ensure you get the financing you want on the best terms possible; however, it can be a lot of work.

Setting yourself up well right from the start can make a significant impact on your success long term. While you can do this yourself, and thousands have, there are specialist Franchise consultants who can inform you of what is available and help you choose suitable options for your business.

A good Franchise consultant should:

● Not be selling their own products but have a range of competitors to choose from 

● Have a keen knowledge of what’s available right now - offers change, and having the latest information could save you money

● Take the time to understand your needs and your business

● Tailor a proposal to suit you

● Value you and your time

Franchise Incentives that can Save You Thousands

Many Franchises offer incentive programs to help new owners get started. Make sure to inquire about incentive programs when you are doing your research to discover what each company offers. Here are some of the possibilities to look out for:

● Reduction in Franchise fee

● Relaxation of requirements for entry

● Marketing expense contribution

● Fee Deferment

● Conversion incentive program - for existing businesses who are interested in converting to a Franchise

There are also incentives for members of minority communities entering into a Franchise business. These can include:

● Reduction in Franchise fee

● Administrative and development support

● Financing assistance

US Veterans have access to some staggering discounts. Veterans have proved to be highly successful Franchise owners, and therefore Franchises offer enticing benefits to bring them on board. Some even waive their entire Franchise fee. There are required conditions Veterans need to meet. Below are some examples, but the list is much more extensive:

● 1-800 Water Damage (15% off initial Franchise fee)

● A Place at Home (10% off initial Franchise fee)

● Aamco Transmissions inc ($8,000 off initial fee)

● Budget Blinds, Inc. has a Troops in Transition Program discounting $75,000 And $15,000 off the franchise fee through their in-house veteran Program.

In fewer cases, but becoming more prevalent, first responders can also find good discounts when entering a Franchise business.

How to Compare Finance Offers

Once you have some offers in hand, be ready to compare them to make sure you choose the most advantageous one for your needs. Below are the major things you will need to consider:

● The interest rates

● Fixed or variable rates

● Monthly payment

● Mortgage insurance payment, if necessary

● Upfront loan costs

● Type of loan and if it suits your purposes

● The term of the offer. The shorter the loan, the less it will cost you overall.

● Additional fees

Compare the total amount you will pay for each loan over the life of the loan, and consider your risk tolerance and the lifestyle each one will help you create.

It’s Time to go get ‘em!

So now you realize that finding and choosing a loan is all about knowing your big picture, where you currently stand financially, and where you want to be.

Know what you want from life as a franchisee. Be clear. Because knowing what you want is the first step to achieving it.

Go ahead and get a solid picture of your overall financial situation: gather your documentation, do the math and start searching for an attainable Franchise that meets your goals.

Now you know how to finance a franchise; you can compare hundreds of Franchises and find the one that is right for you here. Use the sort features to compare businesses by price, revenue, industry and more.

Imagine becoming your own boss, creating the lifestyle you dream of for yourself and your family and being the master of your destiny.

FAQ

Are franchises eligible for SBA loans?

Yes they are! Not all of them, you will need to check the SBA franchise directory for eligible franchises.

Will banks finance a franchise?

Yes, banks will fund franchises as they are generally seen as safer than setting up a business from the ground up.

How to borrow money for a franchise?

You can apply directly to any of the lending institutions mentioned above or get a finance broker to help you.

Is it hard to get a business loan for a franchise?

It’s not ‘hard’ to get a business loan for a franchise. Many franchises offer their own financing or have preferred lenders. There is a lot of document and information preparation, but once done, it is similar to other loan applications. Being sure of the right loan for you and your eligibility before application will save you a lot of time and energy.

What are the best franchises to own?

This depends on your budget, the type of business you are interested in, and what kind of owner you would like to be - hands on or hands off, to name a few. Click here to search by specific criteria to find the best match for you.

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Links included:

https://www.sba.gov/document/support-sba-franchise-directory

https://www.sba.gov/funding-programs/loans/lender-match

https://frantable.com/search