Franchise Financing – How to Get Financing to Buy a Franchise Business
Do you know how to finance a franchise with no money? Are you looking for franchise financing lenders that provide small business loans for a franchise? How difficult is franchise financing with bad credit? What should other franchise financing options look at? Is 100% franchise financing realistic? Are there franchises that offer to finance?
A franchise is a business arrangement whereby one party, (Franchisor) grants the license to use its image, brand name, trademark and processes to another party (Franchisee).
Far back from the mid-19th century, the franchise and franchising business model became operational in the United States. Today, there are more than 1,450 franchisor members of the International Franchise Association.
Finding a franchise that meets your criteria for sale is never a problem. Some many to-be entrepreneurs dream of owning their franchise but know deep down that they don’t have the money for it.
What do you need to finance a franchise? Financing a franchise startup is not very different from financing other forms of starting a business. To finance a franchise, there are however certain things that have to be in place to ensure that the individual secures the most needed financing.
Entrepreneurs who are contemplating on how they can finance their franchise will find this post very useful as it provides everything you need to know in obtaining finance for your franchise.
There are ways through which a franchise can be financed, each with its own peculiarity. Some of the ways to finance a franchise are:
1. Online Loan Platforms
The goal of online loan platforms is to match borrowers to lenders. As someone seeking to finance a franchise, online portals can be a great source of financing by matching the franchisee to a lender.
The applicability of this financing option depends on the franchisor if they subscribe to the online loan platform. These online platforms are more easily accessible than conventional forms of borrowing and always come at a higher cost. Each online platform has its own terms and rules.
The leasing option would be a great way to finance a franchise if the franchisor has movable assets that can be put to use. Movable assets such as types of machinery and vehicles can serve the purpose. The availability of this option would depend on the terms and conditions of the franchisor.
3. Small Business Administration Loans
Small Business Administration (SBA) loans are another good place for financing a franchise. SBA loans usually attract lower interest when compared to what is mostly available outside the SBA structure.
The SBA loans are cheaper because they have the backing and guarantee of the government for such loans. SBA financing is also very popular in the franchise community.
One of the advantages of the SBA is that it offers a number of available loan programs for the franchise. A good amount of SBA facilitated loans go into franchise financing.
“Cash is king” like they say. The cash option remains a valid means of financing a franchise. One of the benefits and advantages of using cash to finance a franchise is that enables the franchisee to start the business on a clean slate devoid of the debt burden.
This option however good, should be followed with caution especially for someone who wishes to operate a multi-unit franchise. To make a better decision, the franchisee can refer to the Franchise Disclosure Agreement, on Item 5 of the document.
5. Commercial Bank Lending
A loan from commercial banks is good for financing a franchise. The loan from the commercial bank usually would be a term loan where the franchisee is expected to pay back the principal amount of the loan plus interest over an agreed period of time.
This initial loan financing option is for setting up the franchise and taking care of initial startup costs such as rent and the license fee. Before the commercial banks can grant these loans however there are certain requirements expected of the borrower, in this case, the franchisee.
These include the borrower’s personal financial statement and personal tax returns papers. The commercial banks would also need to go through some documents for the franchise financing.
One of the documents to be provided includes a business plan, detailing how the franchise would be operated. It is important to point out here that commercial banks favor popular and well-known franchises over newer ones with fewer locations and without a long track record.
6. Franchisor Financing
Franchisors also offer their own financing options for their franchisees, especially fast-growing franchises although not all.
Most franchisors have well-established financing programs for old and established franchisees who want to grow their businesses as well as new franchisees intending to join the program.
Maybe the franchisor financing should be the first option for consideration for the franchisee before seeking for funding from other sources.
7. Special Franchise Financing Companies
There exist special companies that make their business from franchise financing. They make financing available to new franchisees directly or match franchisees to ready lenders.
An individual seeking to finance a franchise should understand that a certain franchise financing option or arrangement that worked for an individual may not work out as well for another and should not overrule certain financing options not listed here such as the option of family and friends.
Keeping expenses and debt low will help to make the balance sheet of the business strong for future lending and financing. So, the individual should adopt the proper financing option that suits his/her after due analysis and appraisal of their situation. Whatever route the individual takes, discipline is important to ensure the success of the franchise.