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Buying a franchise can help entrepreneurs build a business and increase income, but many require an initial investment of over $250,000. For that reason, franchise financing is often necessary to get a new business off the ground or to expand existing locations. There are several types of franchise financing, but the best franchise loans come with accessible eligibility requirements, a streamlined application process and a low cost of borrowing.
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Best Franchise Financing Options
Just as there are several types of business loans, business owners have several options when choosing franchise financing. That said, some types of funding are more appropriate for first-time franchisees, while others are best for those trying to grow their existing franchise business or who need assistance with operating costs.
These are some of the most popular ways to finance a franchise:
1. Online Business Loans
Online business loans are term loans that prospective borrowers can apply for online without having to visit a brick-and-mortar bank. Alternative lenders offer a more streamlined application process that can be completed online. Loans are generally available up to $500,000 or more and, as with traditional business loans, borrowers receive a lump-sum disbursement.
While online business loans can be an excellent way to fund the growth of a franchise, they may be less accessible to startups and first-time business owners. Prospective borrowers who are trying to purchase their first franchise may struggle to meet some lenders’ minimum time in business and annual revenue requirements.
2. Business Lines of Credit
Lines of credit let borrowers access cash up to a set borrowing limit on an as-needed basis. Business lines of credit range anywhere from $2,000 to $250,000, with interest rates between 10% and 99%. Interest only accrues on the outstanding credit balance, and borrowers can pay off their balance and reuse their credit line until the draw period ends—usually between 12 and 24 months.
Business owners can utilize their entire line of credit to finance a franchise, but this form of financing is best utilized for ongoing operating costs. Lines of credit are also well-suited to experienced franchisers who want to expand current operations, rather than first-time franchisees who may not qualify.
3. SBA Loans
The SBA offers small business owners a wide selection of loans, including its popular 7(a) loan program. Loan amounts extend up to $5 million, and funds can be used for most business purposes, including the purchase of a franchise. That said, SBA loans involve a somewhat lengthy application and approval process and may not be a good fit for borrowers who need to access cash quickly.
4. From the Franchisor
Some franchisors streamline the funding process by helping new franchisees get loans and providing a discount on fees. However, this offering is franchise-specific and not all prospective business owners can take advantage of the assistance. Visit the company’s franchise website to see if it offers financing, and review the franchise disclosure document for any relevant financing information.
Tips for Comparing Franchise Financing Options
The best franchise financing option depends on the unique needs of the business owners. For that reason, it’s important to evaluate financing types and lenders to determine the best fit. Consider these factors when comparing franchise financing options:
- Compare each lender’s credit, time in business and annual revenue requirements
- Make sure the lender offers loans large enough to fund your purchase
- Calculate down payments required by each lender, as well as estimated monthly payments
- Review interest rates and other fees
- Determine whether the lender has experience financing franchises
- Evaluate whether the franchisor offers any incentives, such as reduced fees
What Is Franchise Financing?
Franchise financing is a type of loan that helps prospective business owners fund the purchase of a new franchise. Traditional business loans can be used to buy a franchise, but some loans and lenders are better suited to this type of business venture. Many franchisors also offer financing that’s specifically tailored to the business and, therefore, better suited to the nuances of starting a new franchise location than standard business loans.
How Franchise Financing Works
Franchise financing lets business owners finance the initial startup of a new franchise location or expand an existing venture. To finance a franchise, business owners can access funds directly from the franchisor or work with an online lender or other financial institution. Qualification requirements vary by lender and financing type, and the approval process can take anywhere from a few minutes to at least 10 days.
In the case of an online business loan or U.S. Small Business Administration (SBA) loan, approved borrowers receive funds in a lump sum and make monthly payments over a set period of time. Alternatively, business lines of credit can be used to cover franchise costs on an as-needed basis for the duration of the draw period.
How to Apply for Franchise Financing
The process of getting a business loan varies depending on the franchise, type of financing and lender. However, there are a few general steps you should take to obtain the money needed to buy a franchise. Follow these steps to apply for franchise financing:
- Check your personal credit score. Begin the financing process by familiarizing yourself with your personal credit score and credit report. In general, lenders look for a FICO score of at least 600, but higher scores qualify borrowers for more competitive rates. Also check your credit report for any errors and, where appropriate, dispute them before applying for a loan.
- Organize financial documents. Application requirements vary by lender, but most financial institutions review certain financial documents to evaluate how much risk a borrower poses. For example, most lenders need to see a copy of the signed franchise agreement, personal and business financial statements and tax returns, and information regarding current and previous loans. To prepare for—and simplify—the application process, compile these documents in advance.
- Create a business plan. In addition to preparing financial documents, draft a business plan that describes a roadmap for your franchise. This document should detail the franchisor-franchisee relationship and how the funding will be used to help the business succeed.
- Submit an application. Once you compile the necessary documentation, submit a loan application through the lender of your choice. Depending on the lender, this may be as easy as navigating to a website and following an online application tool. More traditional lenders may require you to visit a branch or complete a paper application. Either way, the bank may contact you to request additional information or documents to aid in their review.
- Await approval. In general, lenders take between one and 10 business days to make a lending decision. However, some online lenders may offer immediate or same-day approval. Monitor your email while you await a response so you can address the lender’s outstanding questions as quickly as possible.
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Frequently Asked Questions (FAQs)
What are the costs of opening a franchise?
The costs of opening a franchise vary depending on the franchise and the requirements set forth under the franchise agreement but may range from $75,000 to $500,000. These costs typically include a franchise fee between $20,000 and $50,000, as well as legal and accounting fees and money to build out a new location.
New franchisees should also plan to have working capital, funds to purchase supplies and inventory as well as money to cover living expenses and travel costs while training under the franchisor’s guidance.
Do franchises offer financing?
Franchises may offer several tools to help franchisees fund their new business ventures. In-house financing is offered by some companies, but it’s not incredibly common.
However, many franchises help new business owners by offering incentives and building relationships with preferred lenders. This can make it easier for a prospective franchisee to find a lender that is familiar with the specific franchise’s requirements. Finally, some franchises provide access to financing consultants to streamline the financing process.
Is it hard to buy a franchise?
Buying a franchise can be difficult without access to the cash necessary to do so. High startup costs can be difficult to fund without strong personal credit, and ongoing royalty payments cut into revenue once the business is up and running. Beyond the expense, buying a franchise also involves signing a contract and meeting operational requirements set forth by the franchisor.