A franchise might be the ideal option for anybody interested in becoming an entrepreneur since it combines the freedom and independence of owning a small business with the backing and infrastructure of a major organization. Even yet, starting a franchise necessitates a considerable financial investment, which generally includes a large franchise fee as well as recurring royalties and advertising expenses.
Funding is one of the most crucial components of starting a franchise. Financing alternatives come in a wide range of forms and sizes. The ideal option for you may be a clear solution or a combination of multiple solutions, depending on your timeframe, risk tolerance, credit history, and other factors.
Following are the six most common franchise funding options to make the process of funding your franchise business easier.
Six Common Franchise Funding Options
1. Franchisor’s Financing
Many franchise-based businesses provide specialized funding options for their franchisees, either through agreements with certain banks or by delivering cash directly from the company. This is one of the most frequent methods of financing a franchise, and it has several advantages. Franchisees at Gold’s Gym, UPS Store, and Meineke can take advantage of financing opportunities.
One of the advantages of franchisor finance is that it may serve as a one-stop-shop for all of your needs. Many of these programmes can help you finance not just your franchise fees but also the supplies and equipment you’ll need to get your firm up and running.
2. Commercial Loans
A standard term loan from a bank is another frequent approach to fund your franchise. A bank or alternative provider will give you a large sum of money upfront, which you will then return in monthly payments, plus interest, over a predetermined length of time. While creating business strategy and private payment history will be scrutinized by your lender when you seek a commercial bank loan to buy a franchise.
Your marketing strategy and personal credit report will be scrutinized by your lender when you seek a commercial bank loan to buy a franchise. The lender will use the information to determine your creditworthiness.
3. SBA Loans
The SBA loan is one of the most appealing financing options for prospective franchisees out of all the options available. SBA loans are primarily covered by the US Small Business Administration and financed by secondary lenders. These loans are structured in a similar way to typical term loans from a bank. The SBA, however, creates an incentive for lenders to issue more loans with lower rates and longer payback terms.
To fund a franchise, an SBA loan is an excellent choice. If you have the necessary financial resources and credit score, you should apply. However, the qualifying criteria might be strict, and the application process can be lengthy.
4. Alternative Options
If there is an urgency to start the franchise or you are looking to complement your commercial or SBA loan, you might apply for franchise financing through an alternative option. Alternative lenders often have fewer criteria and faster processing times than traditional loans. They provide a wide range of lending alternatives, including equipment finance, company lines of credit, and term loans.
However, this accessibility and convenience may come at a cost. Alternative lending products are often more costly, have shorter payback terms, and have smaller loan amounts than standard loan products.
5. Crowdfunding Alternative
If franchise funding isn’t accessible and bank, SBA, or other loans don’t work out, you’ll have to get creative to get your business funded. Crowdfunding is one of the newest and most innovative methods to support a franchise. You can create and market a crowdfunding website for your franchise, or you could look at particular groups that crowdfund for enterprises and franchises.
If you have a stain on your credit history and aren’t pleased with the loan products and interest rates available to you, crowdfunding is a brilliant option. Other platforms crowdfund for certain sectors and business kinds, then lend the cash to individuals in need.
6. 401(k) Business Financing
401(k), also known as ROBS (Rollovers for Business Start-ups), is financing. ROBS enables you to fund your company without incurring debt, incurring early withdrawal fees, or incurring tax penalties. This option is most often utilized by those who don’t have enough cash on hand to buy a firm altogether – which, let’s face it, is the situation for the vast majority of us.
ROBS is also ideal for prospective entrepreneurs who may not be eligible for a traditional company loan or don’t wish to put their house or other personal assets up as collateral. It’s a good choice for people who have $50,000 or more in retirement savings who want to increase their money by investing in themselves rather than the stock market.
Two Funding Strategies for your Franchise
1. First-time Franchise Owners
When the franchise fee, royalty fees, and other prospective costs of starting a franchise firm are factored in, most potential franchisees discover they lack the financial means to acquire a franchise upfront. If you don’t have a lot of expertise or a good track record as a business owner, many lenders will be hesitant to provide you a loan. However, it is not impossible, and good fortune favors the prepared.
2. Multi-Unit Operators
If you wish to become a multi-unit operator, the essential thing to remember is that how you finance your initial unit. It will also influence your capacity to fund subsequent units. As a result, if you arrange funding for the first unit without thinking about how it would influence your capacity to obtain future financing, you may find yourself without any choices for funding additional units. Because many bigger franchises demand a three-unit commitment, the most frequent situation is a “three-pack” spread out over a two- to three-year period.