Many people dream of having their own business and financial freedom. It may be hard to develop a business from the ground up, that’s why many entrepreneurs consider franchising. This concept has proved to be quite successful as it allows to quickly set up an enterprise and operate it using ready-made business solutions and help from the franchisor. One of the key challenges prospective franchisees stumble upon is lack of funding. You need to finance part or all of your franchise purchase. Having a properly structured funding plan is often the key to long-term success and profitability. In this article, we will cover some promising ways to finance a franchise, and talk about qualifications for it.
Franchise financing is the funds required for the successful acquisition and organization of a branded enterprise. The price of a franchise consists of construction, equipment, supplies, a lump-sum fee, and other ongoing fees. A lot of people don’t have enough funds to invest. That is why many entrepreneurs consider lenders and various options for franchise financing.
There is no doubt that it is more probable to get financing for a franchised unit than for the development of an independent enterprise. Acquiring a franchised unit is a more safe and sustainable investment. So, potential franchise owners have a good possibility of getting necessary funds for the franchised enterprise development. Typically, entrepreneurs have to prove that they are credible and solid borrowers.
Let’s focus on options for franchise financing available for you. Take a look at them, and determine which is better suited for you.
Franchisor financing
The parent company itself can offer some kind of financing to potential franchise owners. Typically, it can be a partial loan, only in rare cases the franchisor can offer a whole financing. Look into brands you’re interested in and find out whether the corporate office provides funding.
Bank loans
Borrowing funds from a bank is one of the most popular options for franchisees. Nowadays, these traditional financial institutions propose lots of variations of loan terms. Banks typically tend to give funding to entrepreneurs acquiring a franchise of a widely recognized brand with a good reputation.
If you desire to acquire a loan for any startup, then there are certain requirements that borrowers have to meet. Each bank provides different terms for loan applications.
SBA
Entrepreneurs can turn to the Small Business Administration for funding as well. Through them, it is possible to receive microloans at better rates in comparison with other establishments. The SBA is backed by the federal government. It is a legit organization that makes getting financing for franchise owners easier and quicker than from other kinds of lenders.
Partners
You can always find a partner that will help you bring in necessary investment for a franchise acquisition. In the case of a business partnership, it is important to set boundaries and determine the responsibilities of each party. Poorly coordinated cooperation can result in catastrophic consequences. So, it is better to agree on terms of cooperation beforehand.
Borrowing money from the loved ones
Entrepreneurs can always borrow money from friends and family. Bear in mind that it can stretch your relationship with them, especially if the investment does not pay off. So, be careful and considerate. This option is more suitable for people with bad credit history or with inability to acquire a loan from other sources.
Home equity
Using your house as a collateral is another possibility for prospective franchise owners. Figure out how much money is necessary for acquiring a branded enterprise, and secure a proportionate home equity. The main danger of this particular financing method is that there exists a possibility of losing your own home.
Stock assets
Maybe some time ago you bought some stocks and bonds. Now could be the time to withdraw these funds and put them into a franchise purchase.
Retirement plans
There are retirement plans, like 401K, that you can borrow money from. This option comes with its challenges. You will probably have to pay some taxes and fees.
Crowdfunding
This way of collecting money has become extremely popular in recent years. For some people it may be weird to ask for funds from random people. However, it is an alternative route that is worth consideration. You can raise money through online forums or social media.
Alternative lenders
Entrepreneurs in need of a loan can turn to alternative lenders. They are eager to lend funds to franchisees. However, rates of interest could be higher, and the return period is usually shorter.
Franchised packages are sold at different costs. There are low-cost franchises for under $30,000, and there exist more costly offers that can reach millions of dollars in investment. The investment needed for acquiring and launching a franchised unit include a lump-sum fee, construction works, insurance, equipment and inventory, supplies and salaries for employees. It is hard to pinpoint the exact sum required for operating a branded enterprise. The parent company typically shares approximate financial requirements, so you aren’t totally blindsided. You can get in touch with former or existing franchise owners of the brand to obtain a better understanding of what to expect financially.
The best way to compare your financing possibilities is to learn about all of them, including their upsides and downsides, and assess your own abilities. You know yourself and your own financial capabilities better than anyone. Look at your assets realistically. Weigh all advantages and risks of the presented selection of financing options. Determine which opportunity is more appropriate for you, and figure out whether you will be capable to pay off interest rates and a borrowed sum of money on time. Draw up a financial plan, so you can better see what you need and what you can achieve.
Identify your own financial capabilities, and look into your history with credits. Both franchisors and lenders have certain criteria when it gets to approving candidates. There exist some lenders that require a minimum equity capital and a certain amount of liquid cash. You would possess better chances at qualification for a loan if you have a good personal credit score, net worth, and solid resume and professional background.
It may increase your chances at getting a loan if the franchisor backed you up. You can speak with the franchisor and ask him to vouch for you before lenders. But first, you have to prove to the franchisor that you're a fit candidate for a franchise. The corporate office may conduct a background check and ask you some questions about your professional career and experience with credit. If all goes well, the franchisor on your side is a substantial advantage in your ownership path.
The path to owning a franchise business can be covered with lots of challenges and problems, one of which is a lack of funding. Going through the funding options and learning about them, as well as completing the qualification process will help you move closer to identifying the right franchise for you and secure the means to make your dream a reality.
How can I get a franchise with no money?
Every franchise requires a certain quantity of funds. You can always look into low-cost franchise possibilities, or wait a bit before you secure more money before taking this path.
Do banks give loans for franchises?
Entrepreneurs with good credit statements and a well-thought-out plan for enterprise are the most eligible candidates for bank loans. It would be useful to consider banks that have already issued loans for franchised units. These would probably be more likely to loan you money.
Is it hard to get financing for a franchise?
It is more simple than getting funding for any other kind of business. It will help your cause to have a good experience with credits and develop an elaborate business-plan. Your professional future is on the line, so be ready to present lenders with various statements, well-crafted resume, and business outlines.
How much money should I have to start a franchise?
Each franchise business requires a specific sum of investment. There is no telling how much you would need. Brands typically share that information on their websites, or you can look through our Franchise Directory.
Can you get investors to open a franchise?
Yes. You can attract several investors to assist you with necessary funds for acquiring and operating a franchise.
Can you crowdfund a franchise?
Yes. There exist several platforms where you can raise money, like online forums and social networks.
Written by
Vasil Gazizulin
Founder of Topfranchise.com
CEO Expedition 2009 - 2014
Author of a book «GROW WITH A FRANCHISE»