Owning a franchise is one of the most elegant ways to own a business without building it yourself. But before you unlock your doors, one big hurdle awaits: how will you finance your franchise? When you’re acquiring a franchise for the first time or expanding into a new franchise location, you need to know what your financing alternatives are.
This article discusses the best ways to finance your franchise business. From bank loans and franchisor-backed financing to using retirement funds and finding the right lenders, we’ll dive into it all and get you the knowledge you need to know.
At The Franchisee Accountants (TFA), we’ve assisted a multitude of franchisees in deciphering the confusing landscape of franchise finance—and in this guide, we’ll walk you through how to fund your franchise knowing exactly how you’ll do it.
Franchise Financing: What It Really Means
Franchise financing is the way people obtain money to buy, start, or manage a franchise. One of the earliest and most difficult barriers is that of obtaining capital for many would-be franchisees.
When you fund a franchise, you’re spending more than just the (very large) fee to use the franchise name. You will also need to cover start-up costs, working capital, inventory, equipment, and buildout, as well as any royalty fees your franchisor may charge. The form of financing you select, like a bank loan, in-house finance, or other financing alternatives, needs to be a reflection of your business plan and the goals you have in the long run.
The category of franchise you select may determine your available financing options. Major franchise brands already have financing plans or are deeply involved with lenders familiar with the business model. Your credit score, collateral, and business owner or entrepreneurial experience are also among the things that will determine what financing you have access to.
The Best Funding Options for New Franchisees
There is no one way to fund your franchise, but there are several excellent approaches. Both have their pitfalls, and both are appropriate in certain circumstances. Understanding which ones are best for your situation can be a difference-maker in your franchise journey. Let’s look at a few:
Bank Loans & Conventional Financing
The traditional bank loan continues to be the franchisee’s most favoured method of financing for many franchisees. If you have an excellent credit score and a well-prepared business plan, banks may provide competitive interest rates and extended repayment terms. You may also be able to use these loans to finance your initial investment and working capital requirements.
But loans from banks usually have very strict terms. You will need to show the ability to make money in your business plan, put up collateral and, in some cases, give a personal guarantee. Lenders could also request your franchise disclosure document to evaluate the standing of the franchise you’re entering.
Franchisor-Backed Financing
Some franchisors offer financing to help new franchisees get started. This may take the form of a payment plan, financing in real estate, or a joint venture with banks. If the franchisor is able to provide financing directly, it’s an easier process than you might think and can help lower initial hurdles for some applicants.
Check with your franchisor to see if they provide their own financing programmes or have an approved list of lenders who know their franchise concept. This path may also be beneficial for entrepreneurs with a lower credit score or just a lack of experience starting a business.
Loans and Government-Backed Programs
In Australia, the government offers small business loans and grants as a source of funding that can be beneficial to businesses. These are great choices for someone who is new to franchising or for those in emerging markets. In the U.S., a major player in the area of franchise finance is the Small Business Administration (SBA). While there is no equivalent in Australia, you may be able to find local government small business funding based on your location and franchise concept.
Need help picking the right funding options, you can reach out to us.
Why Your Business Plan Is Crucial for Franchise Financing
Whichever route you choose for financing your business, you will need a well-thought-out and complete business plan. A thorough business plan demonstrates to lenders that you are serious and organised and that you understand the financial environment of your franchise business.
In your business plan you should describe:
- (cost of) start-up and how expenses will be paid for
- General and administrative expenses and Royalty expense
- Revenue and Profitability forecasts
- Your life as a business owner/entrepreneur
- A clear repayment strategy
Lenders, franchisors and investors all want to know you have the wherewithal to make your new franchise a going business. Your plan should show how you will run the business, mitigate risks and scale your operations. The more robust your business plan, the more likely you are to obtain financing on favourable interest terms.
You can speak with us if you need a well cut-out business plan.
Using Personal Assets and Savings to Fund Your Franchise
A lot of franchisees invest some or all of their own resources to fund a franchise. If you have some savings or other liquid assets, this can be a low-risk way to finance your franchise without taking out a loan.
Some business owners go so far as to roll retirement funds into a new business via sanctioned financial structures. Using retirement funds to pay for a franchise isn’t without risk, but it can spare you from taking out loans and keep you fully in control of the business. However, make sure you consult with a tax and legal professional before you go this route, since it can have complex tax and legal consequences.
Using personal money can also give you more flexibility to negotiate with franchisors and suppliers. As a self-funded franchisee, you could potentially negotiate down royalty fees or request a little more support.
Asset Finance and Equipment Loans
For franchises that require significant equipment spending, like food and fitness and automotive-related, asset finance can be an intelligent solution. With asset finance, you’re borrowing money to buy (or lease) something physical that you need to do business with—don’t confuse it with traditional loans, where the cash is more flexible.
These loans are generally secured against the machinery itself, so they are easier to get than an unsecured business loan. A lot of lenders provide low interest rates and long repayment schedules that allow the new owners to maintain healthy cash flow while they’re getting started.
Some franchisors have an approved equipment supplier or finance partner that provides discounted packages or special bundled installation promotions as part of your initial franchise purchase.
Working With the Right Lender for Your Franchise Journey
The lender can be as important as the franchise you choose. The bottom line is, you want to be dealing with a lender who knows franchising, knows your brand and offers finance that is specific to businesses that operate within the franchise sector.
Some lenders are even experienced in lending to franchisees and are able to fast-track the application process by accommodating pre-approved financial data provided by the franchisor. These types of lenders are also more inclined to provide lower rates and more advantageous terms of repaying based off the franchisor’s history of success.
Not only can you see how your lending choices stack up, but you can also read to understand the repayment terms and the total cost of financing. Unless, of course, higher interest rates or secret fees eat into your profits.
Give us a call, let’s connect you with the right lenders for your franchise journey.
Evaluating Your Franchise Finance Options Based on Your Situation
There is no cookie-cutter solution for franchise finance. Your personal credit score, business experience, and assets available, as well as the type of franchise you’re purchasing, can have influence over the kind of funding that will be available.
A new franchisee with limited formal credit history may gain leverage from franchisor-sponsored or in-house financing, whereas a seasoned business owner may get favourable terms from traditional lenders. If you’re opening a franchise in a particular region or struggling industry, there may also be government-sponsored grants or programmes available to help start your business. If you love the idea of owning a coffee franchise, here is a list of coffee franchise options you can look into. If you prefer a fitness franchise, you can have a look at these fitness franchise options.
What’s important is to be realistic about your circumstances and opt for a funding route that provides sustainability for your business in the long run. Remember, you’re not just trying to make money; hence, you want to run a business to make your dream a reality.
Tips for Finding the Right Franchise to Match Your Budget
Before you embark on your franchise journey, it is very important to align your budget with the most suitable franchise. And not all franchises are the same; the average investment can vary from tens of thousands to several million dollars.
Search for franchises that fit your aspirations, talents, and bank account. Review startup costs, ongoing franchise fees and cash you need to be working with. Consider how much support the franchisor provides and whether they assist with site selection, marketing or training.
The right-sized franchise for you and your budget will lessen your reliance on high-risk lending and set you up for long-term success. It is also smart to talk to current franchisees in the system to learn about what financial obstacles they dealt with and how they resolved those issues.
Closing Thoughts: Your Franchise Finance Game Plan
Franchise financing is more than securing a loan—it’s about familiarising yourself with funding choices, making wise choices, and positioning your new business for long-term success. Whether it be borrowing from a bank, the franchisor, investing your retirement or financing your assets, there is a method that is fit to your plans and goals.
Remember:
- Your business plan is your guide to financial victory.
- Research loan options, lenders and loan terms.
- Try to strategically use personal/savings/retirement funds.
- Select a franchise with your budget and the money you have in your pocket.
At TFA, we’re a group of enthusiastic experts who want to support you to ensure you achieve a very successful business. Whether you’re working on opening your first franchise and want to learn about alternative lending options or you’d just like to discover the best way to fund your next venture, we have the resources, expertise, and support to help you along the way. Do you feel this is the time to begin your franchise adventure? Contact us today to find out how we can assist you in funding your franchise and establishing your own business from nothing.
