Franchise Financing: 5 Franchise Loan Options Explained
Michael Nicholas / Franchising / May 1, 2023
Starting a franchise can be very appealing for many entrepreneurs interested in running their own company but looking for a head start. For example, franchises allow individuals to start a business with a proven model and an established brand name. This can reduce the risks associated with starting a business from scratch. Additionally, franchisees often receive support and guidance from the franchisor, including marketing assistance, operational training, and ongoing support.
While franchises come with some obvious perks, these benefits come at a price. Franchise fees are the amount franchisors charge potential franchisees for the right to use the company’s brand name, products, services, and business model. These fees typically cover the cost of initial training, ongoing support, and access to proprietary systems and processes. On top of the franchise fee, franchisees can expect royalties, build-out and inventory costs, and legal and accounting fees.
But don’t let these costs scare you off! Many people assume they need a lot of money to open a franchise. However, franchise business loans are available to help you get started. Let’s look at franchise financing options available to people looking to buy into a franchise.
Initial startup costs of franchises range from just a few thousand dollars to a quarter million or even more. Potential business owners who don’t have access to that kind of capital can look into loans for franchises.
Franchise financing can refer to any business loan specifically designed to help entrepreneurs start a franchise. These loans can come from various sources, such as the franchisor, a commercial bank, or even a close family member. Franchisees must consider what type of franchise funding makes the most sense for their situation.
Franchise financing works by loaning an entrepreneur the money needed to start or expand their franchise operations. After evaluating the various loans for franchisees, business owners must apply for funding from their institution of choice.
When applying for franchise loans, lenders will typically evaluate the franchise’s business model, financial projections, and creditworthiness of the franchisee. Some lenders will also require a downpayment to secure the loan. If approved, the franchisee will receive the loan proceeds, which can be used for a variety of purposes, such as paying the franchise fee, purchasing equipment, leasing space, hiring employees, or marketing.
Repayment terms will vary depending on the loan type and lender but typically involve monthly payments over several years. Not all franchisees will be approved for financing, and those who are may face higher interest rates or more stringent repayment terms if they have less-than-stellar credit histories or insufficient collateral.
Luckily there are several options available to prospective franchisees. From traditional business loans to SBA loans and more, each financing option has its own set of benefits and drawbacks. In this section, we’ll examine some of the most popular franchise financing options.
First, potential franchise owners should check with franchisors to see if they offer franchise funding. While many choose to partner with a trusted third party, some franchisors do offer this service in-house. Financing through a franchisor can be a convenient option, as it allows the new business owner to obtain franchise financing from a source already familiar with their business model and operations.
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The Small Business Administration (SBA) is a United States government agency that was established to assist entrepreneurs and small business owners in starting, growing, and expanding their businesses. Fortunately for potential franchise owners, there are various SBA loans for franchisees. SBA loans are issued by various private lenders, but they are all backed by the federal government.
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Conventional banks and credit unions may offer franchise business loans with competitive interest rates similar to SBA loans. However, because the government doesn’t back these loans, they can be much harder to qualify for and often require proof of liquid assets to secure.
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An alternative lender is a financial institution that provides loans and other financial products and services to borrowers who do not qualify for traditional bank loans. They may include online lenders, peer-to-peer lending platforms, and other non-bank financial institutions. These lenders may be more willing to take on higher-risk borrowers or borrowers with less-than-perfect credit scores, as they typically use alternative underwriting criteria and credit models to evaluate loan applications.
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Those who may not have excellent credit or strong finances may struggle to secure loans for franchisees through banks or franchise programs. If you fall into that category, you may ask close friends or family for some money to help you get started. However, it’s essential to consider the old adage that you shouldn’t mix business with personal matters.
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The required qualifications for each of the types of loans for franchises vary based on the institution that will be issuing the loan. For example, only those looking to open franchises listed in the SBA Franchise Directory would be eligible for SBA loans. In addition, SBA loans and business loans from conventional banks will likely require good financial standings from potential borrowers.
Overall, lenders — both institutions and friends or family — will want to see that the borrower has a clear plan for success and the ability to manage and grow a profitable franchise business.
Just like the criteria for who qualifies varies based on the type of franchise funding and the lender, so does the exact process of securing the loan. Regardless of which route you take, getting a franchise loan can be a multi-step process.
Here are the general steps you will need to follow to secure franchise financing:
Before applying for a franchise loan, you should have a clear idea of how much money you need to start or grow your franchise business. This can include expenses such as franchise fees, equipment, inventory, marketing, and working capital. Reading through the Franchise Disclosure Document (FDD) should also help you determine if the franchisor offers in-house franchise loans.
You’re getting a great head start on step two by reading this blog. As you’ve learned, many types of lenders offer franchise financing, including banks, credit unions, and specialized lenders. Research potential lenders that will work with you to find those that offer franchise loans and compare their rates, terms, and requirements.
A well-developed business plan is important to securing franchise financing and allows you to demonstrate how you will pay back your franchise business loans. Your plan should outline your goals, market analysis, marketing strategies, financial projections, and other important information about your franchise business.
Lenders will typically require documentation to support your loan application, such as financial statements, tax returns, and personal and business credit reports. Figure out what exact paperwork is necessary and make sure you have all of the documents needed ahead of time.
Once you have identified potential lenders and gathered the necessary documentation, you can begin the application process. Be prepared to provide detailed information about your franchise business, your personal and business finances, and your plans for growth and success. To increase your chances of securing franchise funding, apply with multiple institutions.
How do I get funding to open a franchise?
Some potential franchisees cover the full cost of a franchise on their own. Meanwhile, others may apply for a franchise loan from a bank, alternative lender, or even a close family member.
Will banks finance a franchise?
Yes, banks do finance franchises. Banks may offer franchise loans, SBA loans, or other financing options to qualified borrowers.
What do you need for a franchise loan?
Exact requirements vary based on the lender as well as the type of loan. However, you will typically need a solid business plan, a good credit score, and a down payment.
What kind of SBA loan do I need for a franchise?
To finance a franchise with an SBA loan, you can apply for the SBA 7(a) loan or the SBA 504/CDC loan. The type of loan you need depends on how you plan to use the funds.
How can I get a franchise with no money?
Starting a franchise with no money is not advisable and will likely be very difficult. Some options you may consider would be starting a franchise with very low startup costs or finding partners or investors.
How much can I borrow for a franchise?
Each lender will have different limits, which will likely be affected by factors such as your credit score, business plan, and cost of the franchise. With an SBA loan, for example, you may be able to borrow up to $5 million.
What are the credit requirements for franchise financing?
Loans for franchisees from conventional banks and credit unions, along with SBA loans, will likely require a good credit score for approval. Credit requirements for alternative lenders may be more lenient.
Opting for a franchise opportunity with a low buy-in is one of the easiest ways to lower the stress around franchise financing. P3 Cost Analysts is a fantastic franchise opportunity with low franchise costs, minimal startup costs, and overhead. In addition, we can help potential franchisees by connecting them with a trusted third party for any additional help needed through small business loans for franchises.
P3 Cost Analysts is a cost reduction franchise that allows potential owners to make a big difference in their community. Owners will earn their living by helping other business owners save money. Not only does P3 help the right potential franchisees secure financing, but you’ll also receive valuable hands-on training and marketing assistance to ensure your new business becomes profitable as soon as possible.
Many franchisees bought into a franchise without the entire investment costs in their bank when they started. So, if you’re in the same boat, don’t fret. Although many franchise opportunities do have large upfront costs associated with them, there are options for you out there.
Franchise business loans can be acquired through the franchise themselves, at conventional banks or credit unions, as SBA loans, or even through alternative lenders or friends and family. Where there’s a will, there’s a way! You stand a good chance of securing financing by doing proper research, putting together a solid business plan, and applying to various lenders.
For those concerned about startup costs, a franchise with P3 Cost Analysts makes sense. Our buy-in rate is affordable, and we can connect you with a third-party lender familiar with our company. So contact us today by filling out the form on our franchising page, and we will help you get the process started.
