The Best Franchise Financing Options of 2022 – Forbes Advisor
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Purchasing a franchise can help entrepreneurs build a business and increase income, but many require an initial investment of over $250,000. For this reason, franchise financing is often necessary to get a new company off the ground or to expand existing locations. There are different types of franchise financing, but the best franchise loans come with accessible eligibility requirements, a streamlined application process, and low borrowing costs.
Offers from selected partners
$5,000 to $250,000
$6,000 to $250,000
time in business
$5,000 to $500,000
time in business
Best Franchise Financing Options
Just as there are different types of business loans, entrepreneurs have multiple options when deciding to get franchise financing. However, some types of financing are better suited for first-time franchisees, while others are best suited for those trying to grow their existing franchise business or who need help with operating expenses.
These are some of the most popular ways to finance a franchise:
1. Online Business Loans
Online business loans are term loans that potential borrowers can apply for online without having to visit a bank. Alternative lenders offer a streamlined application process that can be completed online. Loans are generally available for amounts up to $500,000 or more, and like traditional business loans, borrowers receive a lump sum payout.
While online business loans can be an excellent way to fund a franchise’s growth, they may be less accessible to startups and first-time business owners. Prospective borrowers trying to acquire their first franchise may have difficulty meeting the minimum business tenure and annual income requirements of some lenders.
2. Business Credit Lines
Lines of credit allow borrowers access to cash on demand up to a set credit limit. Business credit lines range from $2,000 to $250,000 with interest rates ranging from 10% to 99%. Interest accrues only on the outstanding balance, and borrowers can pay off their balance and reuse their line of credit until the end of the drawing period, which is usually between 12 and 24 months.
Business owners can use their entire line of credit to fund a franchise, but this form of funding is best for ongoing operating expenses. Lines of credit are also well-suited to experienced franchisors looking to expand ongoing operations, rather than first-time franchisees who may not qualify.
3. SBA loan
The SBA offers small business owners a wide variety of loans, including their popular 7(a) loan program. Loan amounts are up to $5 million and the funds can be used for most business purposes, including buying a franchise. However, SBA loans involve a somewhat lengthy application and approval process and may not be appropriate for borrowers who need quick access to cash.
4. From the Franchisor
Some franchisors streamline the financing process by helping new franchisees obtain credit and offering a discount on fees. However, this offer is franchise specific and not all potential business owners are eligible for assistance. Visit the company’s franchise website to see if it offers financing and review the franchise disclosure document for relevant financing information.
Tips for comparing franchise financing options
The best franchise financing option depends on the individual needs of the business owner. For this reason, it is important to evaluate financing types and lenders to determine the best solution. Consider these factors when comparing franchise financing options:
- Compare each lender’s loan, time in business, and annual earnings
- Make sure the lender offers large enough credit to fund your purchase
- Calculate the down payments required by each lender, as well as the estimated monthly payments
- Check interest rates and other fees
- Determine if the lender has experience financing franchises
- Evaluate whether the franchisor offers incentives such as reduced fees
What is franchise financing?
Franchise financing is a type of loan that helps potential business owners fund the purchase of a new franchise. Traditional business loans can be used to purchase a franchise, but some loans and lenders are better suited for this type of business venture. Many franchisors also offer financing that is specific to the business and therefore better suited to the nuances of launching a new franchise location than traditional business loans.
This is how franchise financing works
Franchise financing allows business owners to finance the initial establishment of a new franchise location or to expand an existing business. To fund a franchise, business owners can access funds from the franchisor directly or work with an online lender or other financial institution. Qualification requirements vary by lender and funding type, and the approval process can take anywhere from a few minutes to at least 10 days.
In the case of an online business loan or a US Small Business Administration (SBA) loan, approved borrowers receive funds in a lump sum and make monthly payments over a set period of time. Alternatively, business lines of credit can be used to cover franchise costs as needed for the duration of the drawing period.
How to Apply for Franchise Financing
The process of obtaining a business loan varies by franchise, type of financing, and lender. However, there are some general steps you should take to get the money needed to buy a franchise. Follow these steps to apply for franchise financing:
- Check your personal credit score. Begin the financing process by familiarizing yourself with your personal credit score and credit report. Generally, lenders look for a FICO score of at least 600, but higher scores qualify borrowers for more competitive interest rates. Also, check your credit report for any errors and dispute any errors before applying for a loan.
- Organize financial documents. Application requirements vary by lender, but most financial institutions review specific financial documents to assess how much risk a borrower represents. For example, most lenders need to see a copy of the signed franchise agreement, personal and business financial statements and tax returns, and current and past loan information. To prepare and simplify the application process, you should compile these documents in advance.
- Create a business plan. Along with preparing financial documents, draft a business plan that outlines a roadmap for your franchise. This document should detail the franchisor-franchisee relationship and how the funding will be used to help the business succeed.
- Submit an application. After gathering the required documentation, submit a loan application through the lender of your choice. Depending on the lender, this can be as simple as navigating to a website and following an online application tool. More traditional lenders may require you to visit a branch or fill out a paper application. In any case, the bank may contact you to request additional information or documents that will help in their verification.
- await approval. In general, lenders take between 1 and 10 business days to make a loan decision. However, some online lenders may offer instant or same-day approval. Monitor your emails while waiting for a response so you can respond to the lender’s outstanding questions as quickly as possible.
Find the best small business loans of 2022
Frequently Asked Questions (FAQs)
What is the cost of opening a franchise?
The cost of opening a franchise varies depending on the franchise and the requirements set out in the franchise agreement, but can range from $75,000 to $500,000. These costs typically include a franchise fee between $20,000 and $50,000, as well as legal and accounting fees and money to build a new location.
New franchisees should also plan for working capital, funds to purchase supplies and inventory, and money to cover living expenses and travel expenses during training under the franchisor’s guidance.
Do franchise companies offer financing?
Franchise companies can offer various tools to help franchisees fund their new business ventures. Self-financing is offered by some companies but is not very common.
However, many franchises help new business owners by offering incentives and developing relationships with preferred lenders. This can make it easier for a prospective franchisee to find a lender who is familiar with the specific needs of the franchise. Finally, some franchises offer access to financing advisors to streamline the financing process.
Is it hard to buy a franchise?
Purchasing a franchise can be difficult without access to the cash needed to do so. High start-up costs can be difficult to fund without strong personal credit, and ongoing royalties eat into sales once the business is up and running. Aside from the cost, buying a franchise also involves signing a contract and meeting the operational requirements set by the franchisor.