Few people are able to fund a franchise on their own, which is why franchise financing is so important. The following are a few questions you may have about financing your franchise.
1. Is franchise financing similar to small business loans?
You may have heard that banks typically don’t like to approve small business loan applications. This may be true for bigger banks due to the perceived level of management risk, but smaller banks are a little more likely to approve small business loans — especially if you already have an established relationship with them.
However, getting financing for a franchise is slightly different than getting a small business loan — franchises are often seen as less risky since franchisees are working with an established brand. This means that you’re more likely to be approved for franchise financing than if you were applying for a small business loan.
2. How can I get franchise financing?
There are a number of different ways that you can go about getting your franchise financed. The following are three different places you can go to get financing for your franchise.
- Banks— According to the U.S. Small Business Administration, franchisees are 15 percent more likely to apply for a commercial bank loan in order to get their franchise up and running than any other new business owner. If you are franchising from an established brand that has proven to be successful, you’ll have a good chance at being approved for a traditional loan.
- Franchise Financing Company— There are actually a number of lenders out there that specialize in providing franchise funding, such as BoeFly and Franchise America Finance. These franchise financing companies will either lend you money directly or match you to another lender.
- Franchisors— Depending on who you are franchising from, you may be able to obtain financing assistance from your franchisor. Bigger franchisors will often partner up with lenders to make it easier for you to get a loan. You can find out if the franchisor has a financing program by either checking their website (they won’t be shy about advertising the fact) or by checking the Franchise Disclosure Document.
Remember that just because the franchisor offers financing doesn’t mean that you have to get your financing through them — always compare financing options to find the option that offers you the best terms.
3. What are SBA-backed loans?
SBA (small business administration) loans, which are also known as 7(a) loans, tend to have flexible terms and low rates, making them one of the best ways that you can finance your franchise. Basically, it’s a program in which the SBA guarantees loans that are issued by lenders participating in the program. So if you are planning on applying for financing at a bank, make sure you see if they offer SBA-backed loans.
4. What do I need to get approved for franchise financing?
You’ll need to determine exactly how much you need to borrow in order to get your franchise up and running. This includes the franchise fee, site development costs, building costs, equipment costs, marketing costs and much more. A lender will want to see the breakdown of these costs.
Lenders will also look at your personal financial history and the current and past financial history of the franchise itself. You may want to consider hiring a financial advisor to help ensure that you provide all the information required to help improve your chances of being approved.