Because a franchise combines the freedom and independence of running a small business with the backing and infrastructure of a large corporation, it is a great alternative for anyone who wants to start their own company. There are still significant costs involved in launching and running a franchise business, including a high franchise fee, ongoing royalties, and advertising costs.
One of the most important aspects of beginning a franchise is securing financing. A wide variety of financing options are available. If your timescale, risk tolerance, credit history, and other considerations allow for it, the best option for you may be a hybrid of several options. Following is a list of the six most typical ways to raise money for your franchise business:
Funding for Franchise: Common Options
1. Franchisor’s Financing
In many cases, franchise-based companies offer their franchisees access to specialized financing through partnerships with specific institutions or by delivering funds from the company itself. Many people use this way of financing, and it has several advantages. Profit from financial assistance if you own a Gold’s Gym, UPS Store franchise, or a Meineke. One of the benefits of franchisor financing is that it can meet all your requirements in one place. Several programmes can help you pay for your franchise fees and the goods and equipment you’ll need to get your business up and to run.
2. Commercial Loans
Another common way to fund your franchise is with a common term loan from a bank. For a set period, a bank or other provider will loan you a substantial sum of money, which you will pay back in monthly installments and interest over a set period. When you apply for a commercial bank loan to buy a franchise, your lender will examine your business strategy and private payment history. When you apply for a commercial bank loan to buy a franchise, your lender will check your marketing strategy and personal credit report. Your creditworthiness will be determined by the lender based on this information.
3. SBA Loans
Potential franchisees might consider an SBA loan as one of their financing choices. As a rule of thumb, the US Small Business Administration is responsible for providing the majority of the funding for SBA loans. Term loans from a bank are comparable in structure to these loans. As a result of SBA programmes, lenders are prompted to offer more loans at lower interest rates and with longer repayment terms. An SBA loan is a great option for financing a franchise. You should apply with the necessary funds and a good credit score. However, the requirements for admission may be stringent, and the application process may be protracted.
4. Alternative Options
When starting a franchise is urgent, or you want to supplement your commercial or SBA loan, you may seek alternative funding. Traditional lenders, on the other hand, typically have more stringent requirements and longer processing timeframes. In addition to equipment financing and company lines of credit, they also offer term loans. However, there may be a price for this accessibility and ease. Compared to traditional forms of credit, alternative lending solutions tend to be more expensive, have shorter repayment terms, and have lower maximum loan amounts.
5. Crowdfunding Alternative
If you can’t obtain franchise finance or bank, SBA, or other types of loans to work, you’ll have to find other ways to support your company. Crowdfunding has become one of the most cutting-edge techniques to support a franchise. A crowdfunding website for your franchise can either be created and marketed by you, or you can look for specific organizations that crowdfund for businesses and franchises. If you have a bad credit history and aren’t happy with the loan options and interest rates accessible to you, crowdfunding is a great choice. Other crowdfunding systems raise money for specific industries and enterprises and lend it to those in need.
6. 401(k) Business Financing
ROBS (Rollovers for Business Start-ups) is another 401(k) name. With ROBS, you don’t have to worry about accruing debt or paying early withdrawal fees or tax penalties when putting money into your business. Many people use this option because they lack the financial resources to buy an entire company outright. ROBS is also a great option for people who aren’t eligible for a typical business loan or don’t want to put their home or other personal assets up as collateral. If you have $50,000 or more in retirement savings, this is a fantastic investment option for those who prefer to invest in themselves instead of the stock market.
Funding for Franchise: Strategies
1. First-time Franchise Owners
Most would-be franchisees find that they lack the financial resources to purchase a franchise up front after accounting for the franchise fee, royalty fees, and other potential startup costs of a franchise firm. When it comes to company loans, many lenders are wary of giving them to those who don’t have a proven track record or competence in the field. It’s not impossible; luck is on your side if you’re ready.
2. Multi-Unit Operators
Remember how you started if you want to expand your business into other locations. It will also impact your ability to secure funding for more franchise units. You may be left with no options for financing more units if you secure money for the first unit without considering the impact it will have on your ability to secure future funding. As a result, the most common scenario is a “three-pack” stretched out over two to three years.