Pursuing your dream of business ownership can require significant funds and acquiring a franchise (as opposed to purchasing an independent operation or starting from scratch) is no exception.
As published online by The Balance Small Business, Common Franchise Costs notes that most franchise fees are between $20,000 and $50,000. On top of that, you’ll likely be responsible for legal and accounting fees, working capital, facility build-out costs, supplies, inventory and more.
All that said, thousands of entrepreneurs purchase franchises every year. Most complete their transactions through any one of the following methods.
Five popular franchise financing options
- Franchisor financing By providing capital directly from the parent organization or through relationships with preferred lenders, many franchisors assist new franchisees with financing. You’ll want to review all such arrangements carefully, of course, but they do offer considerable advantages. You’ll gain single-source convenience for your purchase. Many such lending programs extend to not only the franchise fee but also to the equipment or other resources you’ll need to start your business.
You’ll also work with a lender that, as the franchisor, can anticipate better than most the true costs of opening and operating a franchise. No one knows their business model better and no one is more motivated for you to succeed!
- Traditional loans As with a home mortgage loan, auto loan or other types, a bank or credit union provides you a lump sum of cash upfront for you to complete your franchise acquisition. You’ll then repay the loan plus interest in monthly installments over a set period of time from proceeds you derive from your business. It’s likely your franchisor (or franchise broker) has good working relationships through prior deals with any number of larger commercial banks. Of course, you may already have strong ties to a local credit union.
In any event, the lender will want to review your business plan and personal credit history to assess your creditworthiness. The stronger your franchise model and individual financial history, the better the terms you’re likely to obtain for your loan.
- Small Business Administration loans Similar in structure to loans from banks, credit unions or alternative lenders, SBA loans have one significant advantage: the loans provided by their lending partners are guaranteed in part by the U. S. Small Business Administration. With such backing, these lenders are able to offer aspiring franchisees loans with lower interest rates and longer repayment terms than many other options.
While often the most desirable choice for financing a franchise, SBA loans have their downsides. Qualification standards can be strict, and the application process is lengthy. You’ll want to consult with your attorney and accountant to consider the likelihood of gaining approval for an SBA loan before you spend significant time pursuing this financing option.
- Alternative lenders Borrowing from an alternative lender is often an attractive option if you need funds quickly to finance your franchise acquisition or require additional capital to supplement your SBA or other loans. Alternative lenders often offer shorter application processes and less stringent approval requirements than traditional lenders. What’s more, you enjoy a number of loan options like business lines of credit, equipment financing and term loans.
Of course, all this flexibility comes at a price. Compared to their more-traditional counterparts, loans from alternative lenders tend to be more expensive. You’ll likely receive a smaller lower loan amount and shorter repayment term.
Tip: Google “small business loans” or “franchise financing” to begin your search for alternative lenders. Your franchising company or franchise broker should also be able to refer you to such resources.
- Family and friend loans Financing the purchase of a franchise by borrowing from your family and friends is a popular option. After all, they know you well and many are highly supportive of your success! Whether you elect to borrow the money or bring in a family member or friend as a business partner, these types of loans often proceed with minimal application “red tape” and at a good rate and term.
All that said, be sure to write up a contract that specifies repayment terms and any other expectations. If everyone fully understands the loan agreement upfront, disagreements will be far less likely down the road.
A parting comment on franchise financing.
If you’re interested in pursuing a franchise ownership opportunity with Allegra, we’ll be happy to begin with a discussion of your financing options. We’ve helped countless entrepreneurs achieve their dream of business ownership and can do the same for you.