Are you thinking about making a change in your work life? For many people over the last two years, Covid 19 has changed the definition of work completely. Many have been left considering their options as we enter a new world disrupted by the pandemic. One of those options for people wanting out of the corporate rat race is buying a franchise.
But you might be concerned about a number of things if you’ve never owned a business, and at the top of that list is often how to get financing for a franchise. After all, it can cost upwards of a million dollars to finance some of the most well-known franchise brands out there. McDonald’s, Chick-fil-A, and a host of other franchises can easily require a 7 figure investment, and that’s just not realistic for the average American.
But there are many franchises that don’t require anywhere near that investment, and there are many different ways to get the franchise financing you need. In some cases, the franchisor may offer financing directly. Other times, you may be able to get franchise loans from a bank or other lending institution. Friends and family are always an option, and other options exist as well.
So let’s take a look at some of the most common ways to get financing for a franchise.
1. Ask the franchisor for help
A lot of franchisors have partnerships with lenders who can offer special financing packages to their franchisees. This can be a great financing option if you have a good credit score and don’t have time to go through the loan application process.
You may also find that the franchisor themselves will offer financing outside of a formal bank loan. Entertaining a loan directly from the franchisor is a great option since your lender then has a great handle on the business being financed.
That said, you should always consider all options when looking to finance a franchise. If you have a good credit score, you may have multiple options that provide you with lower-cost loans than the franchisor can offer.
2. Get a loan from a bank or credit union
This is probably the most common way to finance a franchise. If you decide to go this route, make sure that your loan is big enough to cover all of the costs of buying and running a franchise.
While obtaining a small business loan for a startup can be challenging, banks are often more willing to work with a franchise loan. That’s because the franchise often has a track record of success, and you can use that credibility to your advantage.
You will also likely find that franchises have relationships with third-party financiers. These institutions are often very familiar with the franchise and more comfortable making loans.
Regardless, be sure to have a good handle on the interest rate, and the payments you will need to make while in business. It’s very important you understand how a loan will affect your cash flow, and ultimately your ability to continue running the franchise while paying your bills, and your income.
The franchisor can help you develop the financials needed to show the bank in order to secure any franchise loans.
3. Get a Small Business Administration (SBA) Loan
An SBA loan is another popular financing option for buying a franchise, especially if you have limited personal funds for this purchase. The SBA can provide loans up to $1 million for new or growing business owners who need help to buy a franchise. And these types of loans often come with lower interest rates and more flexible terms than other options available today.
These loans are still acquired through traditional banks and credit unions, but terms and requirements are often less than a traditional bank loan. That said, it is still common to need some form of collateral when getting an SBA loan.
There are different types of SBA loans with the SBA 7(a) being the most common for a franchise loan. You can get up to $5 million, with a typical repayment period of 10 years, and sometimes longer depending on what the loan is being used for.
4. Ask your family or friends for help
If you know someone who would be willing to offer financial help, this might not be such a bad idea as long as you can trust them. If you have a trusted family member or friend who has been through the franchising process before, they may be able to offer great advice and provide financing until your franchise starts making money.
Not only is trust key, but you need to be upfront with anyone (especially family) about the risks of any investment. All parties should go into a business investment with the understanding there is no guarantee of a return.
5. Use your retirement savings
Another way to get financing for a franchise is to tap into your retirement savings. Often called 401(k)/IRA Rollover Funding, or Rollover as Business Startup (ROBS), these can offer a number of advantages. These include not having to take out debt in order to finance your franchise, being able to access the funding quickly, and being able to protect appreciation in the business as a retirement asset. This last one can save you large sums of money if used correctly.
Typically you can access the following retirement accounts to get financing for a franchise: 401(k), IRA, 457(b), 403(b), PSP, SEP IRA, and possibly others.
If this is something you are considering, consult with your financial advisors on which accounts you can access.
6. Get a loan from an outside lender
There are many peer-to-peer lenders available today who can help finance most types of purchases, including franchises. These options often don’t require collateral and can make it easy to get a loan even if you have a low credit score. Granted these sources are much more difficult to access and are often best used for a startup with a novel business idea.
Costs to buy a franchise
This is not a one-size-fits-all question since each franchise is going to have different costs and they can vary greatly.
The main costs that drive most franchise startup expenses are the physical location and associated build-out. Any equipment needed to do business, inventory, marketing costs, licenses, vehicles, and other common expenses associated with starting a business. you will also have a franchise fee that typically costs around $20,000 to $40,000.
The range depends on the franchise can be as low as $10,000 for a home-based franchise, to well over $1,000,000 for well-known brands with a large physical presence.
One of the major perks of buying a franchise is you will have a better idea of what these costs are. Compare this to a business you start on your own, and you may not have anywhere near the clarity around what these startup costs will be.
Qualifying for franchise financing
As with any type of loan you will need to complete a loan application to qualify for most types of financing. The terms of that financing will be dependent on your credit score and other factors. Obviously, a better credit score is going to position you for the best terms on most loans.
Lenders are also going to want specifics about the franchise you are buying. Just like a regular business loan, you will need to provide financial projections for the franchise. Again, this is something the franchisor can help with, but you should also get independent financial advice to ensure the accuracy of these projections.
The Bottom Line
Taking the leap into a business of any kind can be a scary proposition, and financing is often the largest concern. That’s for good reason since you’re making a large investment, and for those not used to taking risks, it can be a difficult mental hurdle.
Just know that if you are committed to buying a franchise, there are multiple ways to get financing. And not all of them require you to take out a massive loan with large interest rates.
Remember, the government wants to incentivize people to start their own businesses. That’s why there are low-stress ways to get financing for a franchise assuming you have decent credit, and possibly some assets as collateral.
If you don’t have those things, leaning on friends and family, or leveraging retirement savings are also viable options.