Breaking Down Popular Franchise Financing Options

Franchising is a great opportunity for anyone interested in becoming a business owner. After all, you get the flexibility and independence of owning a business. While also the support and infrastructure of a large corporation. That being said, opening a franchise does require significant investment. And not everyone has that kind of cash just lying around.

However, there are options. In this article, we’re going to take a look at the 6 most popular options for franchise financing.

Franchisor Financing

If you need franchise financing, the first place to look is your prospective franchisor. Most corporations with a franchise business model offer financing solutions for their franchisees. Either with capital directly from the corporation or through partnerships with certain lenders. The main benefit of this type of financing is that it’s a one-stop-shop for all you need. Many programs will finance the franchise fees along with equipment and any other resources necessary to start the business.

Commercial Bank Loan

Another common franchise financing option is a traditional term loan. This is what most people think about when they consider any type of loan financing. If you choose this option, the bank will front you the cash, which you will repay- with interest- in monthly installments over a set term. Of course, the lender will want to review your personal credit history and your business plan. This will be used to determine if you can reasonably afford to repay the loan. The higher your credit score and the stronger your financial history, the better terms and rates you can expect.

SBA Loan

Out of all of the franchise financing options available, this one is the most desirable. An SBA loan is partially backed by the United States Small Business Administration and funded by one of their lending partners.

These loans are similar to traditional loans from a bank or alternative lender. However, the lenders’ risk is reduced by the SBA guaranteeing a portion of the loan. This allows the lenders to offer more loans with longer terms and lower rates. Just like bank loans, these loans also require a strong credit history and credit score.

Alternative Lenders

If you need franchise financing quickly or you want to secure additional funds to supplement your SBA or Commercial loan, this may be an option for you. Usually, the requirements for alternative lenders are less stringent and the application process moves a lot quicker. They offer options such as business lines of credit, term loans, and equipment financing. Keep in mind though, these tend to cost more and have shorter repayment terms. However, if you need to supplement your current financing, it may be worth it.

Crowdfunding

If none of the above are available for your franchise financing, you may need to exercise your creativity. One of the newest and creative ways of getting money is through crowdfunding. You might want to set up/promote your page or you may wish to look to specific organizations that offer crowdfunding for franchises and small businesses. This is an ideal option for those who have blemishes in their financial history and are not satisfied with the options and rates available.

Loans from Friends/Family

You may not realize it, but one of the most common franchise financing options is getting loans from friends/family. Whether you choose to ask for the money as a gift, ask for a loan outright, or bring a friend/family member on as a partner, this option usually comes at a decent price. On the other hand, it could result in lost friendships and family disagreements. If you choose this option, you’ll want to make sure that you have an explicit contract that outlines all the details. This way, everyone understands and agrees to the terms and disagreements are less likely.