A franchise is a perfect opportunity because it offers the support and infrastructure of a large company- but also the chance to be your boss. That being said, it does require a significant startup investment, which includes a franchise fee as well as ongoing royalties and marketing costs. The truth is, not everyone has that much cash just lying around. Most people will need some kind of business funding.

There are lots of options out there, so you may find that it’s a struggle to navigate the confusing waters of financing. We’re going to simplify this process by looking at the six most common financing options for owning a franchise.

6 Franchise Financing Options

Below, we’re going to explore ways that you can fund your franchise purchase.

Franchisor Financing

When you are getting ready to purchase a franchise, the first place to look for funding is through the franchisor. One of the benefits associated with this type of financing is that you can typically get everything you need. They will not only finance the franchise fees but the equipment and other resources as well.

If you’re working with a franchisor that offers to finance, you may not need to worry about seeking other funding. After all, they know the business better than anyone else and understand the risks and the ins/outs of the business.

Before you sign, consider hiring an independent business attorney or accountant to look over the terms of the franchise agreement and the financing agreement so that you can be sure you understand the terms.

Commercial Bank Loans

Another option for franchise financing is a traditional term loan through a bank. This is the type of loan that most people think about when they think about financing- especially if they’ve taken out a mortgage or student loan. In this type of financing, a bank/alternative lender provides you with a lump sum of cash that you will repay with interest over a specified period.

The lender will review your personal credit history and your business plan to assess your creditworthiness. As a general rule, the higher your credit score and stronger your financial history, the more likely you will be approved with a low-interest rate and good terms.

SBA Loans

When it comes to financing for franchisees, an SBA loan is one of the most desirable options. They are similar to traditional term loans, but the SBA guarantees a portion of the loan amount, reducing the risk to lenders. These typically offer lower interest rates and longer terms.

It’s important to note that the qualification requirements for SBA loans are usually stricter and the application is longer. However, if you do qualify, it’s worth the time and effort to pursue this type of financing.

Alternative Lenders

If you need funds quickly or want additional funds to supplement your SBA or commercial loan, you may want to consider working with an alternative lender. The requirements for this type of funding are usually not as strict and the approval process is quicker. Loan options include:

Equipment financing
Business lines of credit
Term loans

However, it’s important to note that the convenience may be costly. These options are typically more expensive and have shorter repayment terms. In addition, the loan amounts are usually lower than other types. However, it may be worth it if you’re not able to qualify for other types of financing or if you need to supplement other forms of financing.

Crowdfunding

If none of the above work out for you, creativity may be required. One way to fund the purchase of a franchise is through crowdfunding. You can set up and promote your page or work with an organization that offers to fund businesses and franchises.

This may be the best option if your financial history isn’t great, or you’re not satisfied with the rates and terms that you qualify for.

Friends/Family Loan

One of the most common ways to finance a franchise is with a loan from friends and family. Whether you choose to bring someone on as a partner, borrow the money, or ask for gifts, this type of funding typically has the best price. However, it may also be the most expensive due to lost relationships because of disagreements.  

If you choose to go this route for financing, make sure you have an agreement in place that details the expectations and repayment terms. Then, make sure everyone involved understands the agreement before signing.

Conclusion

Owning a franchise is a great way to get started as an entrepreneur. It gives you the chance to become a business owner without as much risk because a large corporation backs you. These financing options can help you get started. Contact First Class Lending to learn more about financing your franchise purchase.