Posted by Shivali Anand
September 21, 2021 | 5-minute read (913 words)
Many people would like to start their entrepreneur journey by starting a franchise but lack the financial resources to do so. Although purchasing a franchise is less expensive than launching a firm from scratch, it still necessitates a substantial financial investment. That said, securing financing versus establishing your own business because the business concept has already been proven.
So, what is a franchise? By definition, it is a commercial and legal arrangement between a franchisor (a business's owner) and a franchisee (a person who wants to open a franchise or branch of that company and use its name, products, and trademarks). The franchisee is in charge of selling the franchisor's products and services.
Check out seven financing options for would-be franchisees so you can get a sense of what might work best for you.
Financing from franchisors
Many franchisors assist new franchisees in locating lenders or introducing them to lenders who are likely to accept their franchise loan applications. Some potential franchisors may even walk their franchisees through the loan application process or assist them in obtaining loans from their network of lenders.
Some franchisors provide their franchisees with tailored financing options, either through agreements with specialized institutions or by delivering cash directly to them. Before committing to anything with your franchisor, be sure you understand all the criteria and financing details. After that, compare the franchisor's offer with those of other lenders to choose the best match for your requirements.
Financial institutions that provide franchise financing
Several franchise finance firms link applicants with the ideal lenders or lend directly to prospective franchisees. Some firms will also advance funds to new franchisees on favorable terms if they franchise a well-known company. Some lenders favor particular franchise firms over others if they have already dealt with the brand and have never had any issues with loan repayments.
Bank loans for businesses
A traditional term loan from a bank gives you a large sum of money upfront, which you then repay in monthly payments with interest over a certain period of time. The better your financial history and credit score, the better the conditions and interest rate you'll get on your term loan to fund your franchise.
Despite commercial banks' preference for franchise firms, you must still meet the bank's financing standards. You may need to offer collateral to obtain your business loan in some situations. When you seek a commercial bank loan to buy a franchise, your lender will look at your net worth, business plan, and credit history to see if you can afford to repay the loan.
Loans from the Small Business Administration
Banks and other lenders approve and finance US Small Business Administration loans, but the SBA guarantees a percentage of the loan amount. SBA loans provide lower interest rates and longer payback terms than other lending choices, so your monthly repayment costs may be cheaper.
As the SBA earmarks a portion of its loan authorization exclusively for franchisees, the SBA loan is relatively easier to acquire with the franchise business model. However, check with the SBA Franchise Directory to see if the franchise you're interested in is registered and approved before applying.
Franchise loan applications are generally handled faster than other loan applications since they are already registered with the SBA. The SBA already has the information it needs to evaluate the franchise agreement, which speeds up and simplifies your loan application.
Using a guarantee scheme, franchisors may assist their franchisees with the loan application and qualification process. If the franchisee cannot repay the loan, they may agree to pay off a set sum.
Before you sign any document or agreement, make sure you read the terms of your franchise and finance agreements to understand the financing conditions and prevent any postponed payments. Many of these programs will help you finance not just your franchise fees but also the money you'll need to buy the supplies you'll need to get started.
Getting a loan from family and friends
If you decide to borrow money from a friend or family member, make sure you set out a contract that spells out the payback conditions and expectations to avoid any future conflicts.
Alternative financing options
If you need money for your franchise right now, have poor credit or can't get a standard loan, an alternative lender may be able to help. Alternative loan products are usually more expensive, but they typically have fewer criteria.
Alternative lenders provide unsecured loans, company finance against retirement or other savings, and equipment financing, among other lending choices with shorter payback terms and higher interest rates. Another alternative loan option is to crowdfund for specific sectors and business types on certain websites.
Points to consider
Every entrepreneur who wants to launch a franchise must budget for a few basic costs. If you're looking for a franchise company loan, make sure it'll cover some or all of the following expenses.
Points to consider about installments
To establish your monthly installments, always examine the following four essential elements before applying for a loan.
- The cost of getting a franchise lawyer to evaluate the franchise agreement.
- The cost of real estate and setup for your newly chosen franchise site.
- A franchise fee, as well as recurring royalties and marketing expenses.
- Purchasing supplies and inventories, as well as employing personnel to conduct day-to-day operations.
- The amount you need to borrow.
- The loan's payback duration.
- Monthly interest rate imposed in addition to the principle.
- The loan's other terms and conditions.