How To Finance A Franchise: Franchise Funding Options

If you’re considering opening a fitness franchise, Rick Mayo (Alloy Founder and CEO) shares details on how to finance a franchise and what you need to get financing. There are many franchise funding options and details that need to be addressed.

First, you’ve got to figure out how to fund it and where to go for funding. All franchises involve start-up costs, which franchisors must disclose in a document called the FDD: Franchise Disclosure Document. So review the FDD first.

If you’re wondering where to come up with the funds to launch a franchise, don’t worry. This guide is for you. We’ll discuss franchise funding options, how they work, how to get one, and what to expect from each type of funding available.

8 Types of Franchise Funding

If you’re wondering how to finance your franchise efforts, here are eight funding sources that may be an option:

1. Bank Loans

If you have a good credit rating and a solid business plan, you may be able to apply for a commercial loan through a bank of your choice.

2. Small Business Association (SBA) Loans

The federal government backed SBA Loans. This means they have favorable interest rates and competitive, long-term repayment terms. If you’re a new franchise, consider looking into type 7(a) loans or type 504 loans. You will typically work with a lender that is familiar with the SBA application process. Basically, the SBA will guarantee a certain percentage of the total loan. This makes it more attractive to lenders, knowing they will not have as much risk and exposure involved if the loan goes in default.

Benefits of SBA Loans
- Competitive terms: SBA-guaranteed loans generally have rates and fees that are comparable to non-guaranteed loans.
- Counseling and education: Some loans come with continued support to help you start and run your business.
- Lower down payments, flexible overhead requirements, and no collateral needed for some loans.

3. Alternative Lenders

If you can’t get financing through an SBA or commercial bank loan, you may look into alternative lenders. While the approval process could be faster, the rates are usually higher, and these loans tend to have shorter repayment periods.

4. Personal Assets

If you don’t have the cash on hand to cover your franchise’s startup costs, you may use your assets to help finance your new venture. As long as you can do it without jeopardizing your financial stability, this is a great way to become profitable faster.

5. Rollovers As Business Startup (ROBS)

ROBS allows you to withdraw money from your 401(k) or other retirement savings accounts to fund a new business venture without incurring tax penalties. Talk to a financial professional for more details.

6. Crowdfunding

Some people raise money through online forums to support their franchise efforts. This could be an option for you if you’re comfortable with it!

7. Loans From Friends and Family

People who don’t have the personal assets but are hesitant about taking out a commercial loan can consider getting a loan from friends or family.

How Does Franchise Financing Work?

Most franchisees use franchise financing to pay for startup costs and business expenses. Since these fees can easily cost tens of thousands of dollars, most franchise owners can’t cover them out-of-pocket, and franchise financing makes the most sense.

Franchise financing is a loan meant to cover costs specific to starting and running a franchise. These funds can cover startup costs, marketing, advertising, equip,emt, systems and start-up fees. They should help new business owners get off the ground and on their feet faster.

While loan terms vary, these financing options get you through the first few years of running a business and allow for payback once you’ve become profitable.

Still, it’s essential to know that most franchise financing lenders do require some money upfront, and many ask for as much as 10%-30% of the investment in cash.

How To Qualify For Franchise Financing?

While there’s no one-size-fits-all rule for qualifying for franchise funding. Ultimately, decisions are always up to lenders, but good loan candidates share a few traits:

Positive net worth–or at least more assets than debts.
A minimum amount of liquid assets at their disposal.
Good credit score.
Solid business plan.

If you want to learn more about whether you could qualify for franchise financing, the best option is to talk directly with a lender. They’ll be able to give you a clearer picture of your eligibility and how much they might approve for you.

How To Get A Franchise Loan

Ready to take the leap and get a franchise loan? Follow these steps:

1. Meet With Your Franchisor

The first stop for franchise financing should always be your franchise parent company. They may have in-house financing options or a list of approved lenders they want you to work with.

2. Verify Your SBA Eligibility

Franchises listed in the SBA Franchise Directory usually have many lending opportunities, but you can only access them if you’re an SBA-eligible borrower.

3. Gather Collateral

To guarantee your loan, you’ll need to provide collateral by using your valuable assets, like cash, property, vehicles, or stocks. Generally, the more collateral you can provide, the better your chances of loan approval.

4. Check Your Credit History

You’re in good shape if you keep tabs on your credit report! If not, consider running a credit report on yourself before the lender does. This will allow you to identify and correct inaccuracies or problems before you apply for the loan.

5. Organize Your Down Payment

Most franchise lenders want at least 20% of the loan in cash. Since it can take a while to get this money together, we recommend starting this process with plenty of time to spare.

6. Finalize Your Business Plan

Banks and in-house financing options usually expect a detailed business plan breakdown, complete with revenue and expense estimates. They especially will be interested in your ability to repay the loan and financial projections.

7. Present Your Franchise Information

You’ll have a better chance of getting approved for a business loan if you’re working with a well-known franchise with name-brand recognition and a history of success.

8. Apply For The Loan

Finally, it’s time to fill out the paperwork, submit it to the lender. You could consider talking with several lenders before you apply to compare offers and interest rates and determine if they are the right fit for you. If you apply to more than one lender, realize there may be some reflection in credit checks by other lenders and that may affect your score. So it is best to ask in-depth questions and how the lender’s process works before any credit checks or formal application.

Franchise Funding is Within Reach!

While franchise funding options can feel confusing and daunting, they’re not as tricky as they seem. Follow the tips in this article to secure your franchise funding, or visit our franchise funding guide to learn more about the process.

Article by: Rick Mayo

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