Offering both the flexibility and independence of being a small business owner, plus the support and infrastructure of a large corporation, a franchise can be the ideal opportunity for anyone interested in becoming an entrepreneur.
Let’s simplify the process of financing your franchise business by breaking down the six most popular franchise financing options.
1. Franchisor financing.
If you need funding to purchase a franchise, your first conversation should be directly with your prospective franchisor.
Many corporations with franchise business models offer tailored financing solutions exclusively designed for their franchisees, either through partnerships with specific lenders or by providing capital directly from the corporation. This is one of the most common ways to finance a franchise and offers many benefits. Gold’s Gym, UPS Store and Meineke all offer financing options to their franchise owners.
Each franchisor financing agreement will differ, but some offer to take on as much as 75 percent of the debt burden from the new franchise owner. Agreements might involve deferred payments while the business is starting up, or they may structure repayment on a sliding scale. Have your independent business attorney or accountant review the terms of both your franchise agreement and the financing agreement to help you understand the full terms before you sign.2. Commercial bank loans.
Another common way of financing your franchise is through a traditional term loan from a bank. A term loan is what most people think of when they think of any form of loan financing, especially if you’ve ever taken out a student loan or home mortgage. Under this model, a bank or alternative lender offers you a lump sum of cash up front, which you then repay, plus interest, in monthly installments over a set period of time.
3. SBA loans.
Of all the loan products on the market, one of the most desirable option for aspiring franchisees tends to be the SBA loan. SBA #loans are loans partially backed by the U.S. Small Business Administration and funded by their intermediary lending partners.
4. Alternative lenders.
If you need money to fund your franchise quickly or want to secure additional capital to supplement your commercial or SBA loan, you may want to consider applying for franchise lending through an alternative lender.
Typically, alternative lenders have less stringent requirements and shorter turnarounds than traditional financing options. They offer a variety of loan options like equipment financing, business lines of credit and even term loans. That said, this access and convenience may cost you. Alternative loan products tend to be more expensive, offer shorter repayment terms and lower loan amounts than their more traditional counterparts.
5. Crowdfunding.
You might choose to set up and promote your own personal crowdfunding page or look towards specific organizations that crowdfund for businesses and #franchises. There are also websites that crowdfund for specific industries and business types, which they then lend those funds to people in need of financing.
Crowdfunding is a great option if you have a blemish or two in your financial history and aren’t satisfied with the loan products and interest rates for which you qualify.
6. Friends and family loan.
Believe it or not, one of the most common ways to finance a franchise is by borrowing from your friends and family.
Whether you choose to borrow money outright, ask for a gift, or bring a friend or family member on as your business partner, these types of loans generally come at a very good price. That being said, some come at the cost of lost friendships and family disagreements.
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