How to Finance Your Franchise From tips to resources, get your financing journey started here.
By Clarissa Buch Zilberman Edited by Carl Stoffers
Buying a franchise is one of the most expensive decisions you will ever make. While franchising can help you become an entrepreneur and start a business, finding the funds to make that initial investment might pose a challenge.
If this sounds like you, help is on the way. Plenty of financing resources are available, from in-house options from your soon-to-be franchisor to resources such as the Small Business Administration (SBA), external organizations and more.
Are you still scratching your head? Here, we'll break down the basics of franchise financing, including the types of resources you should look out for and helpful tips to make the funding process seamless.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Financing a franchise: In-house resources
As a perk for aspiring franchisees, many franchisors provide in-house resources for financing. These may include:
- Franchise financing programs. Many franchisors offer financing programs to their franchisees, which can be great alternatives to other, more traditional options such as a bank loan or funding from a private investor. In-house financing programs may include enticing benefits such as reduced rates or better terms and payments.
- Loan guarantees. Some franchisors offer loan guarantees to franchisees, a legal commitment to pay off a debt if the borrower defaults. In terms of franchising, the franchisor will agree to repay the franchisee's loan if the franchisee defaults, making it easier for franchisees to qualify for bank loans.
- Working capital loans. Franchisors may also offer working capital loans to franchisees to cover operating costs, such as inventory, marketing and payroll.
- Royalty fee deferrals. Some franchisors offer to defer royalty fees during the initial stages of getting the franchise up and running. Royalty fee deferral benefits include reducing initial startup costs and easing cash flow management.
- Franchise associations. Are you seeking an internal community for guidance? Franchise associations put together by the franchisor may offer financing advice, overall support and networking opportunities for franchisees. They may also advocate for franchisees on financing and franchisee rights.
Related: Busting Franchising Myths and Choosing the Right Opportunity
General financing resources you should know
There are many general financing resources available to franchisees, including tools, assistance and guidance. The Small Business Administration (SBA) is an excellent resource for small businesses, especially franchisees.
When it comes to offering loan programs and other resources related to financing, the SBA can provide low rates and flexible terms. Some of the SBA's loan programs that are available to franchisees include:
- 7(a) Loan Program. The 7(a) Loan Program offers loans up to $5 million to small businesses for various purposes, including purchasing a franchise.
- 504 Loan Program. The 504 Loan Program is a loan guarantee program that can be used to finance the purchase of real estate, equipment and working capital.
- Express Loan Program. The Express Loan Program is a simplified loan program designed for small businesses that need to borrow up to $350,000.
Besides the SBA, other general resources include:
- Banks. Traditional financing usually means applying for a bank loan. To qualify, having a strong business plan and good credit history is essential.
- Credit unions. Credit unions are nonprofit financial institutions owned by their members, often offering small business loans.
- Venture capitalists. Venture capitalists (VCs) are investors who provide capital to early-stage companies with a high growth potential.
- Angel investors. Angel investors invest their own money in small businesses that are typically in their community.
Helpful books, websites and more
Many online and written publications provide franchising tips and tricks. Some of these resources include (but are not limited to!):
- The Franchise Bible: The Franchise Bible is a comprehensive guide to buying a franchise. The book covers everything from selecting the right franchise to financing it.
- Franchise Financing: Franchise Financing highlights the different financing options available to franchisees. The book includes information on loans, grants and other financing options.
- Industry publications. Publications like Franchise Times and Entrepreneur provide valuable information on franchise financing options and industry trends.
Related: 10 Tips to Go From Employee to Boss, From Franchisees Who Did It
Do your research
The number of financing resources out there can be overwhelming. Do your research, be bold and don't be afraid to seek advice from peers, colleagues and professionals to help navigate your different financing options.
By taking advantage of in-house resources, the SBA and other organizations, you can find the right financing for your needs and start your franchise in a way that will beget success.
Related: Want to Become a Franchisee? Run Through This Checklist First.
