Five Sources For Financing Franchises in the U.S.

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With the current economic status of the country and baffling rates, sources for financing franchises can be a challenge. This is what you hear from the news. Contrarily, Bankers know that a weak economy can also fetch you loans for franchise purchases. All you need to ensure is you have:

  • Good credit
  • Enough cash flow
  • A solid business plan

Along with a substantial and sustainable growth plan, you have to think through financial strategy as well. There are plenty of options available for financing your business. 

Knowing your financial situation can be a directive toward the financial strategy that you might look forward to. 

All you need is to become a little creative with finding the funding. Once you know what is the tentative amount that you are looking forward to borrowing, things get a direction. You may want to consider the lenders for equipment or real estate to be dealt with separately, and so forth. Concurrently, consider having a one-on-one conversation with the existing franchisees. After all, they have done this before you have and come a long way. Even if you would want to take a different approach, their experiences might warn you of the major pitfalls to look into before deciding on the source for financing. 

For franchising, it’s believed not to borrow the entire amount, but rather have some amount upfront. This way you will have a good cash flow and would not end up being in absolute debt. 

Here are five sources for financing franchises in the US.

  • Franchisors

 Many franchisors offer assistance with financing franchises. This can be looked at in the Franchise Disclosure Document or asked directly. The franchisors may end up having a connection with the lenders to help approve your loan amount or even get it done hassle-free. Many times, franchisors offer to provide discounted franchise fees and the likewise. Often, if the franchise has built in-house financing options, it becomes easier to manage the financing source. 

  • Financing from Commercial banks

Financing from commercial banks is one of the most convenient ways to go ahead with. It is a traditional term loan that the bank allows you at a certain rate of interest, given the economic situation and your credit score. As mentioned above, a bad economy might be a good time to take a loan, since the rate of interest is comparatively lower than otherwise. Here the banks will offer a lump sum amount. That principal amount along with the designated interest rate is required to be paid in installments over a fixed period. 

The process for applying for a loan with a commercial bank requires you to have a business plan, details o the franchise you would be taking up, the company’s worth, and hence, loan repayment projection. Whatsoever, the bank just wants to make sure you can repay the loan within the given period. 

As long as, your financial history is top-notch, and the business you are taking up is stable, the loan approval will go through. 

  • SBA Loans

SBA- Small Business Administration. SBA loans are a type of loan available to small businesses on long terms and are partially insured by the government. The U.S. Small Business Administration is a Federal organization that collaborates with lenders to make financing easy. However, the process that follows to get the grant is tedious. 

Generally, these loans follow a similar structure to that commercial bank loans. Since the loan is being secured by the government body, the lenders get ready to get the borrower’s loans at lower interest rates.

  • Friends, Family, or Do it Yourself,

If you have the finances secured with you, then you would not have to worry about borrowing. To put it differently, You have the money to kick-start the business and the surplus to keep the business up and running. You don’t need to scratch your head about arranging the finances. Taking a risk by investing in your retirement fund is worth it when the franchise shows the potential to mint you good profits.

Asking for help or assistance, especially from the family, a friend, a relative, or likewise, comes at a very good price. You can get a family member as a business partner. A point often overlooked is that when the family is involved there is no need for any written documentation. However, disagreements happen in a business, and this might cost you a relationship.

  • Alternative sources

Besides all the above-mentioned financing sources for franchises, there are other alternative sources of financing franchises.  Although the structure of the loan remains similar everywhere, the rates of interest are asked to differ. While Commercial banks and SBA Loans require stringent paperwork, rules, and regulations, there are private lenders which provide loans at higher rates of interest. They might not be very particular about the franchise business’ profit projection, but these alternatives can be heavy on your pocket. With the shorter repayment terms and higher interest rates, this makes it a fairly expensive affair. 

You can get a bit more creative and go ahead with crowdfunding. This is great when you have twitched financial history. You can create your crowdfunding page or approach businesses that arrange and promote crowdfunding events for you. 

Whatever source you wish to go ahead with is only to be decided by you. Get a thorough analysis of your business expense inventory before grabbing a financing source for the franchise. Be aware of the lending market interest rates, take informed decisions, and happy franchising!

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