Franchise Financing: Best Business Loan Options

In this review, we highlight the terms, rates and fees of each franchise financing company, and explain what makes it a good choice. We also share potential downsides of each company, and provide a rating methodology you can use to select the best equipment financing option for your needs.

Franchises can carry significant start-up costs, and owners may need to invest in a property purchase or lease. Even once the franchise is operating, paying for equipment purchases, expansion costs, and taxes can add up, especially when the business goes through periods of low cash flow. Many alternative small business lenders offer franchise financing to help you navigate these challenges. Our team of financial experts reviewed and ranked the top online lenders to help you get funded.

How to Choose the Best Franchise Financing Option

It’s important to choose franchise financing that’s right for you and your business. When evaluating funding options, it’s helpful to weigh several factors so you can understand the pros and cons of each option.

• Loan Features: Consider the specific features of the loan, including the terms, repayment optionality, and the funding amounts available. Make sure that you’ll be comfortable paying back the loan within the specified terms.
• Application process: How invasive are the application requirements, and how much time will you spend applying? Look into whether the application has a hard-pull or soft-pull credit score impact. If you’re in a hurry for franchise funding, consider how quickly applications are approved and loans are funded.
• Interest rates and fees: Consider different types of fees, like origination fees, as well as the minimum and maximum interest rates. A high interest rate can drive up your payments, and your franchise’s income needs to be able to support those higher payments.
• Qualification process: Will you qualify for funding? Factors like the required minimum credit score, annual revenue, and business history can help you to tell whether you should apply.
• Customer support: If you need help, can you get in touch with a live customer service representative? Is multi-channel support available, so you can get the help you need even when you’re also busy running your franchise?
• Online user reviews: Consider what other customers are saying about their experience with the lender on sites like Trustpilot.
• Perks and Bonuses: Are there other reasons to choose the lender, like perks like payment flexibility, advertising transparency, and advanced technology?

What is Franchise Financing?

A franchise is a joint venture between a franchisor and several franchisees. The franchisor is an original, successful business that sells the right to use its name, ideas, and products. The franchisees buy this right to trade under an existing business model.

Franchise financing is a term given to the process of securing a loan for getting your franchise business started. More prominent brands assist these individual stores with trade secrets, marketing, business plans, and other resources to help them succeed.

While franchises are an excellent way to ensure that you have a solid business plan in place, buying into these businesses can be expensive.

Insights Into The World of Loans for Franchises

Start-up costs for owning a franchise can vary from thousands to a few million dollars for some of the more popular franchises. While many franchises will require a franchisee to have a substantial net worth, one can purchase a franchise for $50,000 or less.

The franchisor will charge an initial franchise fee or license fee. Also, there will be a royalty payable based on the franchised outlet's financial performance. Besides this fee and costs, you may be restricted to selling only the stock or goods supplied by the franchisor.

How Much Does It Cost to Start a Franchise?

Buying into a franchise can be costly. The following are the costs that you should expect.

• Initial franchise fee: an initial fee is payable to the franchisor for the purchase of your business.
• Recurring franchise fees: these are often referred to as royalties, which are ongoing fees that you'll pay (usually monthly) to the franchisor as part of the original agreement.
• Marketing fees: the franchisor will most likely take care of the marketing for the brand as a whole.
• Required purchases: franchisors may require that you purchase certain goods or services for use within your store.
• Build out costs: Once you have secured your franchise outlet, you will have to pay initial rental plus a deposit, start renovating your premises, shopfitting, and so on.
• Hiring costs: there will be costs involved with the hiring and training of employees.

Things to Know Before Taking Out Franchise Financing Loan

Franchise loans are available for franchisees, but it's essential that you come armed with the following before approaching franchise financing lenders or a franchise financing company itself.

• Business and Personal Budgets: You will need to budget for the usual business expenses such as rental for the business premises, stock, salaries and wages, insurance, and other overheads. Then you must cover your salary and set an amount aside for unforeseen expenses. Set your goal for breaking even in the first year.
• Your Personal Net Worth: Net worth refers to how much capital you can access to invest in your franchise and tells franchisors and those in the franchise financing business how well you have managed your money historically.
• Financing Options: Do your best to know more or less what your financing needs and options will be. We will discuss these options in the next section.
• Time to Profitability: The franchisor and other franchisees in a chain should know how long it takes to become profitable. Speaking to them should give you a fair indication for inclusion in your forecasting.
• Developing Relationships: One of the biggest causes of franchise failure is because would-be franchisees go into a business with their eyes closed. We suggest that you develop as close a relationship as possible with the franchisor and the bank or lender that will finance you.

Where to Get a Loan for a Franchise?

The following are five different types of small business loans for a franchise.

1. Bank Loans

You will probably find that a successful franchisor's bank will be open to financing franchise opportunities based on its franchise client's track record.

Banks, however, tend to require more substantial documentation and will look at the prospective owner's credit rating and any other business credit ratings more closely.

A bank also tends to require self-contribution from a prospective franchisee and consider any available collateral.

2. SBA Loans

Another possibility is raising a loan guaranteed by the Small Business Administration (SBA). These loans typically offer attractive rates and terms. You should note that the SBA itself does not make loans, though.

Instead, it partners with a financial institution that makes the loan; then, the SBA undertakes to repay a significant portion thereof in the event of default.

3. Retirement Funds

Should you have a 401(k) or 403(b) retirement account, you might be able to borrow against it to fund a business—including a franchise.

There are many restrictions against using retirement funds for anything other than retirement, so be careful and seek a tax professional's guidance when considering this option.

4. Small Business Credit Card

Small business credit cards can be another road to take. They often provide high credit limits, which could make it possible to finance a low-cost franchise with a balance transfer—where the funds are deposited into your business bank account.

This carries its risks, of course, meaning that you could be looking at exorbitant interest rates on your outstanding balance. If handled properly, it could provide you with a good business credit rating further down the line.

5. Franchisor Financing

Two weeks before you purchase a franchise, the franchisor must provide you with a Franchise Disclosure Document (FDD). This document should contain any information about whether the franchisor offers to finance or may finance through one of its established lending partners.

Conclusion

Finding the right financing option can help franchise owners to successfully run their businesses. Financing options like short term business loans and lines of credit allow business owners to navigate challenging cash flow times, invest in business equipment, pay for renovations and expansions, and make other important investments in their business. As you explore these franchise financing options, be sure to consider factors like loan amounts, loan terms, interest rates, and eligibility requirements to determine which option is best for your business.