Top Financing Tips All Aspiring Franchisees Should Know Do you know all the options available to you?
By Clarissa Buch Zilberman Edited by Jessica Thomas
Investing in a franchise can be an exciting yet daunting experience. There are several areas to consider when choosing a franchise to buy — training, branding, operational standards, values and, of course, cost.
With your money at stake, it's essential to have a clear understanding of how to finance your franchise before making a final decision and signing the Franchise Disclosure Document (FDD).
Worried about the money and costs? You're not alone. The good news is there are options and tips to help make investing in a franchise a realistic opportunity.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Understanding the different financing options
It's important to understand the different financing options available before entering into an agreement:
You can finance your franchise through:
- A bank loan
- A Small Business Administration (SBA) loan
- Private investors
- In-house financing
From loan terms to interest rates to down payments, each of these options has its advantages and disadvantages, so weigh them carefully before making any decision.
Related: 10 Tips to Go From Employee to Boss, From Franchisees Who Did It
Financing with bank loans
Bank loans typically offer lower interest rates than other financing options. However, the application process for these loans might be more difficult and require putting up collateral.
If you're applying for a bank loan, you'll need to have a solid business plan in place that outlines your franchise's potential for success and return on investment (ROI). You'll also need a good credit score and a strong financial history to qualify for a loan.
Financing with a Small Business Administration (SBA) loan
The Small Business Administration (SBA) is a federal agency that provides support to small businesses and entrepreneurs. The SBA provides loans that are an alternative to a traditional bank loan.
An SBA loan might be a good option for those who have a limited credit history or lack the collateral necessary for a bank loan. SBA loans are backed by the federal government and are designed to help small businesses get up and running.
SBA loan rates can vary and they might require more paperwork and a longer approval process than other loans do.
Related: Want to Become a Franchisee? Run Through This Checklist First.
Finance with private investors
If you're not interested in traditional financing options or you're simply looking for more alternatives to bank loans, then you might consider seeking private investors to help fund your franchise.
Private investors typically offer the flexibility and support you need to get your franchise started — but they might also require a significant equity stake in your business in return for their investments and advice.
In-house financing
In-house financing refers to when the franchisor offers to finance your purchase of their franchise. Rather than going to a bank or other lending institution for your financing needs, you'll be making payments directly to the franchisor over a set period of time.
Review the terms of your loan
Regardless of the financing option you choose, it's important to carefully review the terms. You must understand the interest rates, repayment information and any additional fees or stipulations associated with your financing.
You might also want to consult with a financial advisor or accountant and possibly legal counsel to ensure that you fully understand the financial implications of your decision.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
Other considerations
There are several other important considerations beyond financing to keep in mind as you navigate the franchising process. For example, it's important to carefully research the franchise brand, speak with other franchisees and understand the business operations of the franchise to ensure it aligns with your goals, values and leadership style.
It's also important to grasp the franchisor's expectations and requirements. Franchisors might expect their franchisees to hit certain metrics. These could include minimum revenue targets, marketing requirements and operational standards.
Be sure to also review the franchisor's FDD carefully and ask any questions you might have before entering into an agreement.
Get ready to work and succeed
Once you secure funding, you should be ready to put in the work necessary to make your franchise a success! From long hours to ongoing training and development to adapting and evolving your business strategy over time, investing in your franchise takes both money and time.
That said, if you put in the work, you'll be well on your way to building a successful business.
Related: Busting Franchising Myths and Choosing the Right Opportunity
