What is Franchise Financing?
If you’ve got a franchise, then you probably need franchise financing.
What are Franchises?
Franchises are businesses that trade their name and operating methods to people in exchange for a royalty fee. They offer both the flexibility and independence of being a small business owner, plus the support and infrastructure of a large corporation. They can be the ideal opportunity for anyone interested in becoming an entrepreneur. But they do require a significant capital investment.
You may be tempted to pour your own money into your franchised location. Or you may want to use your own credit cards or take out a second mortgage on your house. You shouldn’t have to do any of these to finance a franchise.
Franchise Financing from the Franchisor
If you need funding to purchase a franchise, your first conversation should be with your prospective franchisor. Many corporations with franchise business models offer tailored financing solutions exclusively designed for their franchisees. These can be 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. For example, Gold’s Gym, UPS Store and Meineke all offer financing options to their franchise owners.
One benefit of using franchisor financing is that it can be a one-stop shop for everything you need. Many of these programs don’t just offer financing for the franchise fees. They can also offer financing to purchase equipment and other resources you need to start up the business. If you’re working with a franchisor who offers their own financing program, chances are you won’t need to look much further for funding.
Each franchisor financing agreement will differ. But some offer to take on as much as 75% 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 your franchise agreement and the financing agreement. Have them help you understand the full terms before you sign. See entrepreneur.com/article/312476.
Franchise Financing from Traditional Term Loans
These are another option for franchise financing. Many business owners consider approaching their bank for funding. But a traditional term loan doesn’t have to come from a bank. Such loans can come from a credit union or an alternative lender. With these loans, the lender offers a lump sum of cash up front, which you then repay, plus interest, in monthly installments over a set period of time.
These kinds of loans are more likely to be available to business owners with good credit. Lenders will be looking at your financial history, as in how well you pay your bills. A better financial history means interest rates and terms will be better, and it can be the difference between being approved or not.
Franchise Financing from SBA Loans
The Small Business Administration guarantees a portion of the loans made in its name. This gives lenders an incentive to offer more loans, and at better rates and terms. But keep in mind that qualification standards are strict. New business owners in particular are not likely to qualify.
Franchise Financing via Alternative Lenders
Often, alternative lenders have less stringent requirements and shorter turnaround times than traditional financing options. They offer a variety of loan options like equipment financing, business lines of credit and term loans.
But 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.
But it may be worth it if you need to supplement your existing financing or you can’t qualify for a bank or SBA loan or need cash quickly to jump on a life-changing opportunity. So don’t dismiss alternative lending out of hand. Here are some alternative lenders to consider.
Apple Pie Capital
This lender works exclusively with franchise businesses to help them find the solution that’s right for their needs. Get financing for new units, refinancing, recapitalization, remodels, and acquisitions, etc. You can also access equipment financing loans. Apple Pie works with a variety of different lenders, hence the interest rates and terms you receive on your franchise loan will vary, but it will be largely based on the type of product and your qualifications.
Apple Pie Capital is specifically dedicated to franchise financing. Get 5-10 year payment terms. They have flexible collateral options. There are no prepayment penalty options. See applepiecapital.com/franchise-financing.
This lender works with businesses in a variety of industries, including franchise businesses. With CAN Capital, you can access short-term loans and medium-term loans. Terms for the short-term loans range from 3 to 24 months, and 2 to 4 years for the medium-term loans. CAN Capital charges interest as a factor rate.
To qualify for a franchise loan from CAN Capital, you’ll need at least $4,500 revenue per month, a minimum credit score of 600, and 12 months preferred (although they will consider 3+ months with consistent revenue) in business, for their short-term loan.
Qualifying for a medium-term loan is stricter. For a CAN Capital medium-term loan, you’ll need a 680 personal credit score, 7 years in business, and a preferred $350,000 in annual revenue. See cancapital.com/business-loans.
This is one of the easiest and quickest ways to get a short-term loan up to $250,000 or a line of credit up to $100,000. Though OnDeck isn’t specifically geared toward franchise owners, it’s a viable online loan option for any type of small business owner who doesn’t qualify for a bank loan or doesn’t want to wait months to receive loan funds. See ondeck.com.
This lender has numerous franchise partners across the US, including Papa John’s, Pinkberry, Quiznos, etc. Funding Circle offers various loan products through partnered lenders for franchises in different stages of growth. For Funding Circle’s standard term loans and lines of credit, you’ll need to be a franchisee with a business that’s at least two years old and have a credit score of at least 660.
But they also offer merchant cash advances, short-term working capital loans, and invoice financing. These choices have higher rates, but more lenient requirements. For example, for an MCA, you’ll only need six months in business, and a credit score of 500.
Get online SBA loans up to $5 million for commercial real estate purchases, loans up to $350,000 for debt refinancing and business capital, and bank term loans up to $500,000. This lender is only an option for established franchises. You’ll need at least two years in business, positive cash flow, and good personal credit. See smartbizloans.com.
Franchise Financing via Crowdfunding
If you have a decent social media presence and a fairly large number of friends or followers, crowdfunding may be feasible. Acquaintances aren’t likely to send you thousands of dollars. But a few bucks here and there can add up. Crowdfunding is also a way to get funding without having to give up a portion of control and ownership.
Angel Investing and/or Loans from Friends and Family
The main difference between the two is angel is investing is actually a sale of some of your ownership and control, whereas loans from friends and family are much like more formal loans from a provider. Your family and friends are under no obligation to charge the kind of interest rates prescribed by the Federal Reserve, so they could potentially charge more. On the other hand, they aren’t obligated to charge interest at all.
Your family and friends are under no obligation to put anything in writing, but you should do so anyway, for the sake of your sanity if nothing else. Having your family and friends loan you money or buy a part of your business will change the dynamic. Can your relationship stand the strain?
Business Credit for Franchises
Franchises, just like every other form of business, can build and improve their business credit. As long as they are an LLC or corporation it is fine. Note: you need each company you want to build business credit on to have its own EIN number.
But keep in mind, many franchises may require purchases directly from headquarters or suppliers specifically designated by them. This can be anything from uniforms to beef, to architectural plans for erecting a new building or renovating an existing one. It will always pay to check.
Franchise Financing: Takeaways
Franchises need funding, like every type of business. Check with the franchise itself to see if they have funding. Check the SBA and your bank, and alternative lenders. Consider crowdfunding, angel investing, or loans from your friends and family if other sources are not forthcoming. And be sure to build business credit for your franchise!