5 Most Popular Approaches to Franchise Financing

franchise financing

One of the first things you should know about franchise financing is that you’ll need lots of capital. If you need a loan to open your franchise, it’s important to learn about your options. Being a franchise owner offers you the flexibility of being a small business owner. However, you’ll still receive the support of a larger corporation to help you build your company.

Here are some essential tips for learning to how to buy a franchise, as well as the best franchises to own.

Financing Basics

It’s best to understand the cost of franchises, you should take several factors into consideration. In addition to the capital you’ll need to start your business, you’ll also have to pay franchise fees and royalties, which are ongoing. Running a franchise also means you’ll have to pay for advertising to attract customers. Of course, everyone doesn’t have access to large sums of money to start a franchise, and it can be challenging to sort through all your financing options.

There are six popular methods for financing a franchise. Once you learn about each option you can decide which one(s) work best for you.

Franchisor Funding

You should discuss funding a franchise with your franchisor to see which options are in place for the company when it comes to new business owners. If the corporation you’re considering has a business model that provides financing solutions through lenders or partnerships. This is a common option for covering the cost of franchises and helps to ensure your success. Several franchises, including Meineke and Gold’s Gym offer this franchising option.

When you receive the funds you need from your franchise corporation, you’ll get all the resources you need to help your business grow. Several of these programs also provide a way for you to cover your franchise fees and buy the resources and equipment you need to get your business going.

If your franchisor provides a private financing program, you probably won’t need to utilize other resources. Since the corporation knows the business better than other funding sources, the company understands that intricacies of the business and can help you make a profit.

When you want to buy a franchise, be aware that not all financing agreements are the same. Some corporations will take care of up to 75% of your debt. You may also be able to take advantage of deferred payments while your business is in its beginning stages. Or, you can pay what you want on a sliding scale. Be sure to look over all franchising paperwork with your lawyer or accountant to make sure you understand all aspects of the agreement before you agree to it.

Commercial Bank Loans

You can also turn to bank loans for franchise financing. If you’re opening a business, you’ll most likely want a traditional term loan. This type of loan is ideal for financing, particularly if you’ve taking out a mortgage or student loan in the past. Using this model, the alternative lender or bank will provide you a large amount of cash initially. You’ll repay the loan with interest over a specific period of time. In most cases, you’ll make a loan payment each month.

When you apply for a bank loan to buy your franchise, the bank will look over your personal credit history and business plan. These factors will be used to determine your approval. The bank uses these documents to see how likely you are to repay the amount you’re asking for. The more likely you are to repay, the more money you’ll be approved for.

SBA Loans

When it comes to loans for franchise funding, the most viable option is usually a SBA or Small Business Association loan. These loans are partially supported by the U.S. Small Business Administration and the funding comes from several lending partners.

SBA loans are pretty similar to conventional term loans from an alternative lender or bank. Since the SBA lowers the risk to lenders by security part of the loan amount, these lenders have the incentive to provide additional loans with reasonable interest rates and longer timelines for repayment.

If you’ve proven that you’re financially responsible and have a high credit score, you’ll likely be approved. However, keep in mind that the guidelines are strict and the application process can be lengthy. Consider your chances of approval carefully before you spend time applying for an SBA loan.

Alternative Lenders

If you need funding for your franchise without having to wait long and you need to secure more capital as a supplement to your SBA or commercial loan, an alternative lender is ideal.

Usually, alternative lenders don’t have very strict requirements for approval and the turnaround time is shorter than it would be for a traditional loan. You can also take advantage of different types of loans like business lines of credit, term loans and equipment financing. However, the easy access and convenience of receiving business funding from an alternative lender could cost you.

In many cases, alternative loan products are more expensive and the repayment terms are shorter, while the loan amounts are lower. However, alternative funding could be beneficial if you need to supplement business costs. These types of loans are also ideal if you don’t qualify for an SBA loan.

Crowdfunding

If you don’t want to apply for bank or SBA loans, you don’t want to agree to the terms of an alternative loan and your franchisor doesn’t offer financing, you may want to consider crowdfunding. This is a newer method for financing your new business.

You can create your personal crowdfunding page or working with organizations that do crowdfunding for franchises and other small businesses. Depending on your industry, you can also utilize websites that offer crowdfunding options, such as lending money to up-and-coming business owners.

Most Popular Franchises

If you’re seriously considering becoming a Chaps Pit Beef franchise owner, you may want to do some research on the top 10 franchises in your state, region and the U.S. to see how the barbecue restaurant compares. This will allow you to set a realistic budget and get an idea of the capital that is required for you to open your restaurant. It’s also important to note that Chap’s is known for its value and likability, so this can help you determine how to appeal to local customers and provide quality service.

These tips can help you finally realize your lifelong dream of becoming a franchise owner. Careful planning and using the right resources can help you own a successful small business for years to come.

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