Finding the correct franchise financing is integral to securing a loan for your business. Whether you’re pursuing a conventional or business loan, the options available to owners are vast.
Lenders provide all these types of loans, making it easier to find a finance option that works best with your needs and ambitions. We discuss seven franchise financing options and how they affect the maximum loan size, amount financed payments, and interest rates.
What Is Franchise Financing?
Franchise financing refers to how a franchisee pays for franchise fees and business expenses such as initial merchandise, equipment, or value-added products. There are numerous financing opportunities available for all types of franchise businesses.
These options vary in structure to determine the amount of the loan. Interest rates also vary based on the size of the loan.
How Can You Get Financing for a Franchise?
Financing options vary based on the franchise type, location, and financing needs. In some cases, you will need to provide collateral for a loan. Banks and lenders will want to see that you can support the loan and pay it back.
These franchise loan requirements make it essential to research the appropriate financing options for your business to know whether you need a traditional loan or if other types of loans work better for you.
How to Finance a Franchise With No Money
As a franchise owner or manager, you may wonder how you can get financing without money. The following section will outline the types of franchise financing and discuss how to find the ideal option for your business, no matter what type of franchise it is.
The 7 Best Franchise Loans in 2023
What are the most likely sources of funding for a franchise? Lenders have become more open to franchising as well as other business ventures. Franchise loans range from traditional bank loans to some unique financing options available. We explore the seven financing options available and what it takes to qualify for a loan.
The SBA loan is a government-sponsored commercial loan program that offers small business loans of up to $5 million to help improve their operations or finance working capital. With the 7(a), for example, you can invest in your project, including:
- Equipment, fixtures, and improvements and their installation.
- Inventory and warehousing costs, such as rent and utilities.
- Paying franchise fees.
The SBA loan offers excellent flexibility, with lower down payments and no collateral required. This financing option provides loan guarantees allowing borrowers to obtain financing with competitive rates and fees. Some SBA loans also offer continued support, such as technical assistance and business counseling, throughout the process.
Banks or Credit Unions
Franchisees can usually secure financing from banks or credit unions. They offer a wide variety of financing options and capital to fit the needs of your project.
With a bank loan, you make payments based on your cash flow. The amount you receive depends on the value of your franchise. You will also need an up-to-date credit report, business growth plan, and good credit history.
Online Business Loans
Online lenders differ from banks and credit unions because you will not receive face-to-face meetings or much assistance after the initial loan approval. They do offer short application times, as well as fast loan approvals.
Many online lenders offer franchise loans, but the interest rates and fees will vary. However, these loans might be less accessible to startups and first-time business owners, who might not have the business credit score and history needed to qualify.
Most franchisors will offer financing options to their franchisees. These options allow them to provide more value to the franchisee and help them start the business. Some franchisors will finance the entire project, while others offer partial funding, requiring the franchisee to make a down payment.
If your franchisor has a loan program, read it carefully to understand the terms and conditions before signing on for a loan.
Lines of Credit
Lines of credit give business owners access to cash on a needed basis. They factor in a set borrowing limit based on your credit score, business location, and the current financial needs of the business.
You can choose to get a line of credit to finance business expenses or as a bridge financing option for your franchise.
Rollovers as a business startup (ROBS) is a new way of financing your business through an existing 401(k) plan. This type of loan allows you to withdraw money from your retirement account before you retire and use it as loan capital for your business.
Rollovers can be risky because you use your retirement plan for collateral. In addition, although legal, the IRS may consider it questionable so pay attention to the details of your plan before you make any decisions.
Friends and Family
Having exhausted your options and still needing more funds, you may need to turn to family and friends for help. As long as you have a reasonable expectation of repayment and your family and friends agree to the terms, this is an excellent way to get funding for your franchise.
The downside is strained relationships if things go wrong in your business or you cannot repay the loan on time.
What Franchises Offer Financing in 2023
Several franchises offer to finance franchisees. These franchises include pizza chains, car dealerships, gyms, and real estate deals.
For example, Marco’s Pizza® works with financial partners to offer franchise owners financing options. The lenders offer favorable terms like low-interest rates and flexible repayment terms.
What Are the Credit Requirements for Franchise Financing?
You will need to have a good credit score. This requirement means that you have a good record of paying bills and loans and have a solid history of making on-time payments.
Can you repay the loan if there is an unexpected event? You’ll need to show that you already own or have access to some type of real property for your business plan to be considered viable.
Franchising is a popular way to start a business. Financing is the backbone of any business and offers the opportunity for many types of financing options for franchisees. With the right financing option, you can expand your online business and improve your cash flow by getting a loan explicitly tailored to meet your particular needs.
An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround, financing and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.