How to Finance a Franchise

Jason Smith

Jason Smith

Senior Author

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Jason Smith

Senior Author

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If you’re considering starting or purchasing a business, you may be thinking about acquiring a franchise. One of the hardest parts about opening a franchise is finding the capital you need to finance the startup costs. Many franchises require that you pay an upfront sum to the license holder prior to starting business. In addition, you’ll need to have capital to purchase equipment, buy inventory, and put down deposits on leases or property purchases.   We’ve put together this post to help provide additional information on franchises and how they can be financed.

Contents

What is a Franchise?

How to Finance a FranchiseIf you have a simple understanding of various business models, you probably understand the basic concepts of a franchise. A franchise is a form of business in which you purchase the rights to sell and distribute the products of a parent company using their branding and resources. A popular example of a franchise is an individual McDonald’s restaurant. McDonald’s doesn’t directly own all of their restaurants – instead, they sell the rights to own a McDonald’s restaurant in exchange for an ongoing fee. McDonald’s has considerably less control over their restaurants as they would if they owned them directly, but they’re still responsible for up keeping the image as a whole. For this reason, they supply all the marketing materials and ensure that restaurant owners are adhering to certain business standards. Purchasing a franchise is a great way to step into a brand that is already recognized and accepted by consumers. But the cost of acquiring the brand is much higher than it would be to start your own individual restaurant.

Various Methods of Financing

There are a number of ways to finance a franchise. Your options will depend on the exact franchise you are taking over, but we will overview the top options from a generalist prospective.

Internal Finance

Some large franchise owners will allow you to finance your franchise internally with their company. This can be done either through an extended loan, or by increasing your earlier payment. For example, you may only have to put up limited capital for the business. The franchiser will then charge you extra fees for the first few years in order to make up the original upfront payment that you should have made at the beginning. It is effectively a delay of the upfront costs – but it is an effective way to avoid sourcing funding from an external source.

Traditional Business Loan

Most commercial banks will provide finance to individuals seeking to purchase a franchise. The benefit of purchasing a franchise is the reputation that comes along with a branded name – lenders look kindly on those who are purchasing a franchise from a large franchiser with a history of success. This reduction in risk will mean that you benefit from lower requirements than if you were to start a business completely independently. This being said, there is an inherent risk in business and the lender will most likely require collateral – especially if you don’t have an extended commercial borrowing history. Traditional business loans typically have much lower interest rates than many other forms of finance, and are therefore a favorable option for many prospective business owners. Even if you are approved for internal financing through your franchiser, you should shop around for commercial loans to see if you can find something with an even more favorable rate.

SBA Loan

A Small Business Administration (SBA) loan is a traditional business loan that is also backed by the U.S. Government. It is given out by certain commercial lenders. Because it is backed by the federal government, it is much easier to acquire than a traditional business loan as lenders know they will not lose all their capital if you default on the loan. The loans are relatively short-term in length – typically running between three and five years. For this reason, you should ensure that you will have the cash flow that is necessary to meet the demands of a SBA loan. You don’t want to sign up for a short loan-term hastily, it can mean that you are unable to meet the financial requirements of the loan if payments are too large.

Niche Forms of Financing

There are various government initiatives set up to help supply financing to individuals with diverse and underrepresented backgrounds. For example, if you are a minority or woman business owner, there are various loans available to help you finance a small business. Some of these loans come in the form of microloans – small government funded loans that are distributed by community organizations. All community organizations that provide microloans are nonprofit and have a specific mission statement in regards to who they lend to. If you feel you have a diverse background that is underrepresented in the business community, you should thoroughly research these microloan organizations. If you’re a military member, you should contact the Department of Veterans Affairs, they have an awesome financing program that can help you get the money you need for a franchise at an extremely low rate. The ‘Patriot Express’ program can lend you a $500,000 loan at the lowest possible rates – it’s a great way to get the capital you need to start a franchise if you’re a current military member or veteran.

Verdict

Buying a franchise is an exciting investment. Despite not owning the overall brand that you’re investing in, your individual restaurant is your own independent experiment in which you have no profit restrictions. While the upfront costs of purchasing a franchise can be extremely intimidating, it’s important that you don’t let the raw figures scare you. Buying a brand name with a proven track record is one of the safest business investments you can make – as long as you’re prepared to research locations and work hard to set up the business. You should consider all the financing options mentioned in this article prior to deciding the best funding route for your business. Keep in mind that each parent company has different protocols, and some may be able to offer you unique deals in terms of financing – make sure to talk to them about all of their available options prior to sourcing outside capital.

FAQ

Getting Financing for a franchise can be difficult to obtain, but the hard work will pay off with a profitable business. The good news is that there are many different options when financing a franchise.

How to Get a Loan for a Franchise

One of the most common ways to finance something is through a loan. This section is one how to get a loan to finance a franchise whether it is through a bank or a different type of lender.

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How to get a small business loan for a franchise?

You can get a small business loan through a bank or other lenders. Another way that is more favorable for someone without perfect credit is to get a loan from family and friends.

How to apply for a business loan for a franchise?

The first step would be to fill out an application with your lender of choice. They’ll need your financial information and business plan and will also check your credit history as part of the process.

Can you open a McDonalds franchise with a loan?

Yes, you can open a McDonalds franchise with a loan. You can get a loan for a McDonalds franchise with any normal lender such as a bank. A SBA loan would be one to consider as well.

How to get a loan to buy into a franchise?

There are many different options for a getting a loan with a franchise. Perhaps the best thing you can do is ask your franchisor which lenders have been the most willing to lend for their franchises in the past.

How easy is it to get a franchise loan?

Finding a loan for a franchise is not the easiest thing is the world. However, a plus side when looking for a loan is that there is a myriad of options.

Can I get a franchise loan without collateral?

It is possible to get a franchise loan without collateral. SBA loans do not need any type of collateral but can be difficult to acquire. Other lenders will still give out loans without collateral but will ask for other guarantees.

How to get a loan to buy a pizza franchise?

You can get a loan to buy a pizza franchise through a bank or alternative lender. A lender will ask for a business plan, credit history, and collateral to be approved for the loan.

How to get approved for a franchise loan?

You’ll need to start by going to a lender to look at your loan options. The lender will usually want you to fund about twenty percent of the franchise fee yourself before lending you money.

How hard is it to get a SBA franchise loan?

An SBA loan is done by private lenders but is partially backed by the government in case of a default. Being that the SBA loans are backed by the government they have higher qualification standards.

How to get a SBA loan for a franchise?

The first step to getting a SBA loan is to find which one of their loan programs is right for your franchise needs. You can look at their loan programs at the website www.SBA.gov.

Can you get a loan to start a franchise?

Yes, you can get a loan to start a franchise. You will still usually have to put some money into the franchise fee but can get additional financing through a lender or your franchisor.

The Financing Process

The financing process for a franchise can be difficult to understand. This section is on the process as a whole and answers questions on different ways to get financing for your franchise.

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How to finance a franchise with no money?

It is difficult to open a franchise business with no money, but it is possible to do. One way to do it is by having the franchisor finance it. You can pay back the loan through the business earnings.

How to finance a franchise restaurant?

You can finance a franchise restaurant through many different ways. You can get financing through banks or through the U.S. Small Business Administration.

Can you finance a franchise?

Yes, you can get a franchise financed. The process is similar to that of getting other loans with the lender checking your credit along with the track record of that franchise.

How to finance a franchise business?

You can finance a franchise business by using a commercial bank loan. The bank offers you cash up front, which you then repay in monthly installments.

How to finance a franchise start up?

One option to finance a franchise start-up is through alternative lenders. They offer many different type of loan options like equipment financing and business lines of credit.

How to get financing to buy a franchise?

One alternative way to finance a franchise is through crowdfunding. This is a great option for financing is you have some imperfections on your financial history.

How to get financing from a bank for a franchise?

You can get financing from a bank to open a franchise. To get the financing the bank will want to review your business plan and personal credit history.

How to get Muthoot Finance franchise?

You can franchise a Muthoot Finance ATM as part of your business if you have the space. There is an initial franchise fee but later you can reap the earnings of the ATM on your property.

Do banks finance franchises?

Banks give out loans for all types of reasons and one of them is to finance franchises. You just have to go through the appropriate channels to get a loan through them.

How to finance a 7-11 franchise?

7-11 has an internal financing program the offer up to sixty-five percent of financing. The other portion needed can be acquired through banks or other lenders.

Can a franchise have equity financing?

A franchise can have equity financing. It can use equity financing to pay for the startup costs of a franchise. It can also be used in conjunction with other financing.

How to finance a hotel franchise?

You can finance a hotel franchise by applying for a loan. There are many different loan types available to hotel franchise. There are loans directly from the franchisor, from banks, or from alternative lenders.

How easy is it to get franchise financing?

It is not the easiest thing to get financing for a franchise. To get a traditional loan you usually require a good financial history but there are different financing options out there.

How do you calculate the cost of financing franchise?

The franchisor will usually help you calculate the cost of financing a franchise. It is in their best interest for you to succeed in building the franchise so they will help you along the way.

Who finances a franchise?

The person starting up the franchise chooses who finances it. The franchisor sometimes has an options to finance it themselves or at least a portion of it if you so choose to use it.

How to finance a Subway franchise?

A subway franchise can be financed through a variety of different ways. One very good option is through the U.S. Small Business Administration backed loans called a SBA loan.

How to raise financing for a franchise?

There are many different ways to raise financing for a franchise. One good way to raise financing is to use your current 401k to finance the starting up costs.

Does SBA finance start up franchise?

SBA will finance the startup of any franchise. They will finance it as long as the applicant qualifies for the loan that is. The SBA loan is one the best when it comes to loans for small businesses.

How to finance a McDonalds franchise?

McDonalds is one of the most popular franchises that can be financed through banks. Being one that has been tried so many times means that banks are more likely to give out loans for that business plan as it is proven many times.

Other FAQ

This section is on other frequently asked questions such as, how to fund buying a franchise, who funds insurance franchises, and how are veterans getting funding to start a franchise.

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How to fund buying a franchise?

You can fund the startup of franchise by getting a loan. The loan could be from a bank or lender but does not have to be from them. Another option is to raise funds from family and friends.

How to get funding to buy a franchise?

You can get funding through buy a franchise by using your 401k. Just open a new 401k account in your businesses’ name and you can then transfer your old one into the new one.

How to get funding for a McDonalds franchise?

A McDonalds franchise can be funded through a SBA loan. A SBA loan has lower interest rates than normal loans and does not need collateral as part of the terms.

How to get funding to start a franchise?

You can get funding to start a franchise through a number of ways. A good option is to get a loan by using asset financing. Your assets such as equipment or inventory will serve as collateral to get the loan.

How are veterans getting funding to start a franchise?

There is a special program in place to loan money to veterans. It is called the Patriot Express Pilot Loan. This loan can be used to start a franchise and offers even better terms than a SBA loan.

Who funds insurance franchises?

It is the decision of the person starting the franchise who finances it. The franchisor usually offers partial financing and advice on where to apply for an additional loan.

What is a franchise fund?

A franchise fund is a service provider of administrative support services. The services are provided to the VA and other federal government clients.

Jason Smith


Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state. 

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