Starting a franchise is a wonderful idea. It is an opportunity for anyone interested in becoming an entrepreneur, but you need money to finance your franchise.

Buying a franchise is a costly undertaking, and although getting a loan for a franchise is easier than an independent business, you may still have to go through long processes.

Financing a franchise requires a significant input of capital. The franchise fee might be huge, and not only that; you may be required to continue paying ongoing fees.

Starting a franchise is not easy, especially when you need more financing. But do not worry; we have made this article for aspiring franchisees looking for a way to finance their franchise.

We have put together nine best ways you can finance your franchise. We also included frequently asked questions that will assist you in your venture.

What is franchise financing?

Franchise financing is when a lender agrees to fund an aspiring franchisee's quest to own a franchise. Many future franchisees need help to cover the cost of starting a franchise as they may not be able to do so from their pocket, hence the need for assistance to fund the franchise.

A lender may offer a loan to help the franchisee cover the initial and ongoing costs, then the franchisee will pay back later with interest.

Nine Best Ways to Finance Your Franchise

Below are franchise financing options you can leverage to finance your franchise.

1. SBA-Backed Loan

One of the most desirable ways to fund your franchise business is through the Small Business Administration (SBA) loan. The Small Business Administration (SBA) does not directly give entrepreneurs loans but assures the bank that if they default, the SBA will pay back a significant part of the loan.

The SBA, however, has certain requirements you must meet to get the guarantee, and the financial institutions giving you the loan may also have additional requirements.

These loans are the same as traditional term loans from a bank. Still, they are easier to get and come at a reduced interest rate because the SBA is involved, and the financial institution is sure of getting part of the loan if you eventually default.

Knowing they can never lose out, these financial institutions quickly give out loans once the SBA is involved. In other words, the bank is loaning you the money, and the SBA backs up the loan. Getting these loans takes a lot of work and you must have a good credit history.

If you are an aspiring franchisee looking for a way to fund your franchise, I would advise that you apply for SBA. But before doing that, ensure you are qualified to save yourself the time and stress of going on a fruitless venture.

2. Crowdfunding Financing Options

Crowdfunding is another great way of financing franchises for aspiring franchisees. You can set up and promote your crowdfunding page online or go to organizations that specialize in crowdfunding franchises.

You can also use websites that crowdfund for the industry and business types you intend to open. Crowdfunding is ideal for aspiring franchisees whose credit records are not encouraging and who do not have the opportunity to get a loan at good interest rates.

However, organizing and running a crowdfunding campaign can be money-intensive and time-consuming; only some entrepreneurs can handle that. Your investors may also want a profit percentage when you eventually buy the franchise. Hence, crowdfunding is not a perfect franchise financing option. 

3. Find Partners Or Investors

Who said you must start your franchise alone? You must not buy a franchise alone; you can partner with entrepreneurs to invest in your franchise to raise funds for you. Many entrepreneurs buy businesses with partners as it helps in funding. When you have partners or investors, you only need to contribute a little money, and funding will no longer be an issue.

It is even more beneficial when those partners contribute good ideas to the franchise operations. Again, using your partner's money lessens your risk. The downside of partnership in the franchise is that you may meet investors or partners who do not contribute to the franchise's growth. All they are after is the profit from the business.

 4. Friends and Family Loan Options

Borrowing from family and friends is another way to finance a franchise. You can ask them to lend you some money, make them partners, or even ask for a gift. Loans from family and friends usually come at a low-interest rate.

Friends and family already know you, there is therefore no need for further investigations. They know how credible and dedicated you are to building a successful business, so they would be willing to help by offering a loan or a gift.

If it is a loan, make sure you write an agreement containing repayment terms and interest rates to avoid future problems as involving family in business can result in conflicts in the future.

This is why it is important to take it seriously and write an agreement for whatever you collect that is not a gift. However, sourcing support from family and friends is a good way to fund your franchise. However, you will want to do it the right way, regardless of whether you are getting funding from your family or friends.

5. Bank Loan

Another way you can fund your franchise is through bank loans. Bank offers you some money that you will have to repay in monthly installments over a set period at a particular interest rate.

Although banks do not like giving loans to start-up businesses, it is not so for a franchise. Once you buy a franchise from a notable business with a good record and are credit-worthy, many banks will be willing to give you a loan.

When you apply for a bank loan to buy a franchise, the bank looks into your credit history and business plan, and this is to know if you can repay the loan when given to you.

You may also be asked to put up collateral or contribute at least 20 to 25% of the upfront costs. Having a good financial history helps to speed up your loan-securing process.

6. Franchisor Franchise Loan

Some franchisors offer finance to their franchisees. Many brands with franchise business models make financial provisions for their franchisees. It could be by forming partnerships with some loaners or offering them capital directly from the company.

When franchisors form partnerships with loaners, they approve loans faster and give them out at a lower interest rate.

The franchisor also provides a document that contains information about any franchise loan offered through the franchisor a minimum of 14 days before the purchase of the franchise. This document is known as Franchise Disclosure Document (FDD).

A Franchisor loan is a good funding source because the financing source already knows the franchise to a certain extent. However, ensure you understand the full terms of the agreement before signing. You can involve your business attorney to guide you to avoid mistakes in signing an agreement.

 7. Alternative Financing

As much as we recommend SBA loans, some alternative lenders would be more than willing to lend you money for your franchise. They are known as alternative lenders.

Alternative lenders are more flexible with their requirements than traditional financing institutions. However, alternative loan interest rates are usually higher than traditional loan institutions.

The advantage of seeking a loan from alternative lenders is that you can get funding faster than from traditional banks. Once your application is accepted, you can receive funding within a few days.

However, some alternative lenders have differing views to fund start-up businesses. These may insist you run the business for months and generate a specific amount of revenue before they can lend you money.

Alternative financing is, however, a good choice for franchisees who could not source financing through SBA and from family and friends or maybe got funds but are looking for a way to supplement it.

8. 401(k) Business Financing Options

401(k) Business financing is a common method of buying a franchise. It is also known as Rollovers for Business Start-ups or ROBS. 401(k) Business financing is a financing option that allows you to use your 401(k) or another retirement account as capital to buy your franchise location.

Many franchise buyers worked for a corporation and have a 401(k) retirement plan. If you are one of them, you can roll your 401K or your business into a ROBS rollover. ROB rollover allows aspiring franchisees to access the income they have gotten from retirement without paying taxes.

401(k) Business financing enables you to finance your business without debt. If you are an aspiring franchise needing more cash on hand to purchase your franchise, this method is for you.

Also, if you did not qualify for a business loan and maybe you do not want to give your assets as collateral for a loan, you should then give this financing method a chance.

9. Equipment Loan

This method is best if you are an aspiring franchisee whose franchise requires a piece of expensive equipment. You may be able to get financing for equipment you desire to buy for your franchise.

There are lenders whose area of specialization is in this area. Equipment loans are relatively easy to get as they are secured by a physical asset.

Different funding options are available for franchises with special equipment they need to purchase. These options include equipment financing, leasing equipment, sale-leaseback, etc.

In equipment financing, the equipment serves as collateral, and in sales leaseback, you can be given money for existing equipment. But you should know that not paying back would result in equipment repossession, which is not good for your business.

Frequently Asked Questions About Franchise Financing

1. Is franchise financing similar to small business loans?

Securing financing for a franchise is different from financing a small business. Franchises are less risky as they work with an already proven and most likely successful brand.

On the other hand, small businesses are seen as riskier as a lot of work needs to be done in establishing the business and making it successful. Hence franchises are more likely to get financing faster than small businesses.

2. What do I need to get approved for franchise financing?

You will need to arrange your financial history the right way to get franchise financing options. You can employ the services of a financial adviser so you can avoid mistakes that will jeopardize your chances of getting approved.

It would help if you also decided how much it would cost to run your franchise before asking for financing. Most lenders would ask for a breakdown of your franchise financing cost; hence ensure you make a proper list compilation of all you need. The list may include building costs, marketing or advertising cost, equipment cost, franchise fee and many more, as the case may be.

3. How can I finance my franchise successfully?

To successfully finance your franchise, you will have to source for a loaner and then proceed to all the requirements needed to get the loan; doing this will give you a higher chance of getting your loan application approved.

You can also seek advice from your franchisor; your franchisor is better positioned to guide you and recommend the best financial institution that will loan you money. Having a good business plan is equally an advantage; a good business plan can motivate your loaners to swiftly give you the funds you need.

4. Can banks give loans to franchises?

If you have a well-crafted business plan and your creditworthiness is proven, you may be given a loan for your franchise. But it all depends on the bank. Some banks have different approaches to offering loans to start-up franchises. Hence it is better to go to a bank known to give loans to franchises.

5. What can make my franchise finance loan application be rejected?

One of the things that can make your franchise loan application get rejected is a poor business plan. When you approach lenders and they see that your business is not a good one, they will have no choice but to reject your application.

You do not need to be told that your franchise will most likely not succeed with a poor business plan. Other reasons your franchise finance application may be rejected include the following:

1. Your franchise does not have a proven brand model

2. Your credit history shows you are not creditworthy

3. You do not have any collateral

These and some other reasons are why your franchise financing application may be rejected.

6. How much does running a franchise cost?

The cost of running a franchise will depend on your requirements, such as location, cost of setting up the franchise, how much equipment will cost and how much allocation will be needed to set up the franchise. The best thing to do is to list all you will need and find out their cost. That way, you will be able to know how much is required.

 7. What are the things I should do before approaching a lender?

Before meeting a lender, make sure you verify your creditworthiness, your net worth and your income. You should also make sure you have a good track record. These are things the majority of lenders look out for.

Once lenders find out you are not creditworthy, they will likely not agree to give you the loan you require as it is assumed you won't pay it back. A bad track record of extravagant spending can also make them not accept your loan application. Ensure you look at these things before meeting a lender to save time.

8. How do I get approved for franchise financing?

The method of approval greatly depends on the loaner. Most loaners begin by consulting you to know how much you want to borrow, get information about the franchise you want to purchase and know your business plan.

Once this first stage is settled, the lender does due diligence about you and the brand you want to buy their franchise. The next stage is the approval stage, where you will be sent all the documents finalizing your deal with the lender.

9. What questions should I expect in a meeting with lenders?

Lenders will always ask about your business plan. They would want to know your plans to make your franchise a success. It would be best to craft a good business plan worthy of funding. A poorly crafted business plan gives the impression that the business will fail.

You may also be asked about your credit history and net worth. Ensure you carefully verify the two before meeting with your prospective lenders.

10. Can I ask my franchisor for financing?

Many franchisors make provision that helps their franchisees with financing directly from the larger company. Some others have lenders who they have worked with in the past that they can recommend to franchisees. Asking your franchisors for financing is a good idea. If they can't help, they will at least direct you to the right source.

11. Do I need the assistance of a franchise attorney?

A franchise attorney is a business lawyer who is well-informed about franchising issues. A franchise attorney will guide you through the buying process and everything it entails. Having a franchise attorney is important but optional.

However, you may want to get one to avoid doing things the wrong way or making decisions that will affect you negatively.

Conclusion

Buying a franchise is a wonderful opportunity to become an entrepreneur, but financing the franchise could be challenging. With the options listed above, financing your franchise will no longer be a problem.

Ray Glover, CFC, Glover Franchise Consultants