Opening a franchised business can be an expensive undertaking, which is why many franchisees require financing to cover the initial costs. Typically, you have to pay an initial franchise fee to the franchisor for the right to operate the business. These fees can range from a few thousand dollars to hundreds of thousands of dollars, depending on the franchise.
In addition to the franchise fee, you may need funding to cover the cost of building out the physical location. This can include renovations, leasehold improvements, and equipment purchases. You may need funding to cover the day-to-day operating expenses of the business until it becomes profitable.
Marketing and advertising to promote your new business needs capital. Not to forget, you may need funding to attend initial training programs and ongoing support from the franchisor. This can include travel expenses, lodging, and fees associated with attending training programs and franchisee conferences. With appropriate financing, you can cover the initial costs of opening the business and ensuring you have enough working capital to stay afloat until the business becomes profitable.
Other than your own personal savings or borrowing from friends and family, there are several types of funding available for franchise businesses in the US. Here are some of the most common options that franchisees use:
SBA loans are a great financing option for small business owners, including those seeking franchise financing. In fact, SBA loans account for 10% of all franchise financing. However, it’s important to note that the SBA requires franchises to be listed on their Franchise Directory in order to qualify for financing.
To get your franchise listed, the franchisor must submit a Franchise Disclosure Document (FDD) outlining the franchise’s history, finances, and marketing strategies to the SBA for review. Once approved and listed on the directory, your franchise will be eligible for SBA franchise financing.
Of the various SBA loan programs available, the 7(a) loan program and the CDC/504 program are great options for franchise businesses. The 7(a) loan program can be used for a variety of franchise purposes, including working capital, equipment purchases, and refinancing existing debt. The CDC/504 program is specifically designed for financing real estate or equipment needs for franchise businesses. Both programs offer longer repayment terms and lower interest rates than traditional bank loans, making them an attractive financing option for franchisees.
This loan is different from the SBA 7(a) loan because it must be used for very specific purposes, such as purchasing or renovating fixed assets like real estate or equipment. The loan can range in amounts of up to $20 million, with terms from 10 to 25 years.
Unlike the 7(a) loan, the 504/CDC loan has three parties involved in the lending process: a bank, a Certified Development Company (CDC), and the borrower. This collaborative effort can lead to more complex interest rates than the 7(a) loan, but they typically range from 4% to 7%.
Although the 7(a) loan is often the top SBA loan option for franchise financing due to its flexibility, the 504/CDC loan may be a better choice if you’re purchasing new equipment or buying, improving, or expanding the real estate for your franchise location.
To qualify for an SBA 504/CDC loan, your franchise must be listed in the SBA Franchise Directory, and you must meet the same qualifications as a 7(a) loan. This includes having a great credit score, solid business financials, and at least some time in business.
While an SBA 504/CDC loan requires higher qualifications and is slower to fund compared to other options on the market, it offers some of the best rates and terms for financing real estate or equipment needs for your franchise.
These are a traditional source of business funding that has been available for many years. These loans can be secured or unsecured, meaning you may or may not have to provide collateral to qualify. They typically have a set term and amount borrowed, and the interest rate is fixed over the life of the loan. One of the benefits of a conventional bank loan is that the funds can be used for any aspect of running a business, such as purchasing inventory, expanding the business, or buying new equipment.
To qualify for a conventional bank loan, lenders will typically look at your personal credit history, as well as your business’s financials. A strong personal credit score and a FICO score of 680 or higher are usually required. The lender may also look at your business’s revenue, expenses, and cash flow to determine if you can afford to make the monthly payments on the loan.
The application process for a conventional bank loan can be time-consuming, and it may take several weeks or even months to receive funding. However, if you have a solid credit history and financials, and you are willing to put in the effort to secure the loan, a conventional bank loan can provide your business with the funding it needs to grow and succeed.
This is a financing option provided directly by the franchisor to its franchisees. This financing option can include discounts, reduced royalty fees, or even a loan to help the franchisee with start-up costs. The franchisor offers this financing option to help new franchisees get started and to ensure that the franchisee has the necessary resources to succeed.
To access Internal Franchise Financing, the franchisee will need to work directly with the franchisor. The franchisor will typically provide information about the financing options available to the franchisee, along with any terms and conditions. The franchisee will need to meet certain criteria to qualify for the financing, such as having a strong business plan and meeting certain financial requirements. The terms of the financing will vary depending on the franchisor and the needs of the franchisee.
Using an IRA or 401(k) rollover to finance a franchise business is an increasingly popular option for entrepreneurs who may not have access to traditional forms of financing or who are looking to invest their retirement savings into a new venture. This option allows individuals to use their retirement funds to start or acquire a franchise business without incurring taxes or penalties for early withdrawal.
The process of using retirement funds to finance a franchise involves setting up a C corporation, which then creates a 401(k) plan. The entrepreneur can then roll over funds from their existing IRA or 401(k) plan into the new 401(k) plan. These funds can then be used to purchase stock in the corporation, which in turn can be used to finance the franchise business. This method of financing is attractive because it allows entrepreneurs to use their own funds without taking on debt or diluting ownership by bringing in outside investors.
