Most people cannot afford the cost of a franchise outright. Even if you have the capital, that could be better used to maintain a positive cash flow as you start your business, especially if you plan to open multiple units. Luckily, there are a multitude of ways to finance, ranging from the traditional to the not-so-traditional. Your dream is within reach; just consider your financial options.
1. Traditional Bank Loan
Banks and credit unions are still great sources for financing. In fact, franchise owners are 15% more likely to use a traditional loan than other new business owners. As a franchisee, you are at an advantage among other entrepreneurs in receiving a loan because you are likely backed by a well-established brand with a proven record of success. The bank will still, however, check your net worth and credit history.
Understand your net worth before you meet with a loan officer. Simple personal balance sheets are available online where you can compare your assets and liabilities. They will also evaluate your income and credit history. Banks prefer to give loans to those with a track record of stability– stable job, income, and location. If your track record does not reflect this, prepare a good explanation as to why. Further, it may be necessary to prepare a business plan before meeting with the bank.
Financing is not offered by most franchises, but franchisor financing programs do exist. Franchisors will typically partner with lenders to offer these types of programs. The types of plans vary from franchise to franchise. If financing is offered, it will be listed in item 10 of the FDD. Financing can be for the entirety of startup costs, a portion of the costs, or specific costs and fees (equipment, franchise fee, etc.). Some franchisors will even waive certain fees for select franchisees.
Going through the franchisor has both some benefits and drawbacks. Because of the franchisor’s partnership with the lender, it may quicken the loan acceptance process and improve your chances of getting approved. This being said, sometimes it’s not the best and most competitive loan terms you can receive, so you should still consider other options.
3. Franchise Financing Company
Companies exist that match franchisee borrowers with lenders. Examples of franchise financing companies include BoeFly, which has helped Dunkin Donuts and Great Clips franchisees, and Franchise America Finance.
This applies to hard assets and equipment needed for your business. Do your research on leasing. You may be able to find a good leasing company on your own, but the franchisor itself may be a good resource as well. Some franchisors maintain relationships with equipment leasing companies and this can even mean special financial offers for you.
5. Investor/Business Partner
Sometimes interested franchisees only have one or the other: experience and skills or startup capital. Occasionally, franchisors will pair these two types of people up. Other times, partners find each other on their own. Also consider angel investors or venture capitalists to invest in your franchise startup. Investors and partners will either give the money as a loan or with an agreement that they receive a certain percentage of profits later. Sometimes it’s a mix of both. It has the potential to be a win-win. You have the opportunity to launch your business, and they should see financial gain.
6. Home Equity
If you have enough equity in your home, you can choose to get a home equity loan. This type of loan can be risky, however, because your house acts as collateral. If you’re unable to pay your debt, you can lose your home.
7. Retirement Plans
If you have significant money in your IRA, that could help cover your startup costs. If you’re over the age of 59, you can receive this money penalty-free, however, if you’re under the age of 59, you will face a 10% penalty for withdrawing. 401ks also provide an interesting financing opportunity; read more on that here.
8. SBA Loans
SBA or Small Business Administration loans are great options for many franchisees. The franchisee will apply for the SBA loan directly through the lender. It can take a little more time, but if approved, the SBA will guarantee the loan up to 90%. This greatly improves the likelihood that the lender will extend you credit.
9. Veterans Loans
Multiple programs exist for veteran franchisees/entrepreneurs. The SBA has a Patriot Express Pilot Loan program. They accept veterans with lower credit scores than other SBA applicants and will guarantee up to 85% of the loan. Another program that is provided by the IFA, International Franchise Association, is called VetFran. The program includes over 300 franchisors who offer veterans discounts and incentives related to their startup costs.
10. Minority/Women’s Groups
The IFA has programs for both women and minority franchisees. IFA has programs like Diversity Institute and MinorityFran. The participating franchisors offer financial incentives, including reduced or deferred franchise fees, to minority applicants. The Women’s Franchise Committee within the IFA does not offer any direct financial incentives, but it is still a resource for financial information and networking.
11. Local Incentives
Sometimes states and cities will offer job creation programs within their regions in order to attract new business. They will often offer tax credits and sometimes even loans. To find out if your location has these types of programs, contact local officials.
12. Online Loans
Online loan portals are making it increasingly easy to find a lender. Sites like these link borrowers with lenders. The IFA Supplier pages are a great resource to find these portals. Contact your franchisor as well because they may be subscribed to one of these services.
Consider Your Options
You have many sources of finance available to you. Do your research and compare multiple sources to find one that is best for you. Consider combining multiple sources of finance to match your financial needs.
Navigate your FDD to find Franchisor Financing options.