Opening a franchise can provide a great opportunity, whether you’re a new entrepreneur or a seasoned professional.
Rather than starting a company from scratch, you can leverage an existing brand and infrastructure to hit the ground running.
But like all business opportunities, you’ll need some capital to get started.
We’ve got everything you need to know how about your franchise funding options
What is a Franchise Business Loan?
Financing a franchise provides funding for you when you decide to start local business that is franchised out from a larger company.
Rather than creating your own business from scratch, you instead purchase a company roadmap from a larger chain. You’ll get access to franchisee support services, the company’s trademark and logo, vetted products or services, and a model of how to run the business.
This model can help guarantee lasting success if your market is right, because it’s already a proven concept in other locations.
Many small business owners, especially new ones, like the flexibility of running their own company while still have a support structure in place should they need it. Depending on the industry and your location, there could be a much lower risk when you precisely follow the plan.
What kind of companies are often operated as locally-owned franchises? There’s a broad range, but some of the most popular options are fast food restaurants, hair salons, tax services, real estate firms, and tutoring companies.
Starting costs vary depending on the brand and the operation and while they often start as low as tens of thousands of dollars, they can easily reach six figures for a high volume business. A franchise business loan can give you the capital needed to finance these startup expenses.
What can franchise financing be used for?
Franchise costs can be broken down into three categories: the franchise fee, ongoing royalty fees, and advertising fees. These include both startup and maintenance costs.
The franchise fee is a one-time expense that is paid either in a lump sum or broken up into installments. They’re also non-refundable, so make sure you’re committed to this idea as a long-term investment.
The royalty fees are collected regularly by the parent company and typically amount to a percentage of your gross revenue. On average, expect to pay between 5% and 6%, but it could be more depending on your specific franchise.
You’ll also be required to pay an advertising fee, which can either be a one-time cost or an ongoing one.
Typically, franchise loans are used for the upfront costs associated with opening your new business. Ongoing costs like royalty fees should be a part of your business model so it’s important to factor those in as a regular expense — just as you would with supplies or new product.
How do you qualify for business loans for franchises?
Before you apply for any financing opportunities, take a few steps to get prepared.
The first thing you’ll need to do is check your personal credit score, which is an important factor in any business loan decision. It’s especially true if you don’t have any small business experience, but no matter your work history, you’ll need good credit to qualify for a loan.
Your credit score reflects how responsible you are with your finances, and lenders look to your personal life as a predictor of how you’ll act in your professional life. Next, pull together some basic information on your own finances.
Requirements vary by lender, but you’ll most likely need income statements to verify your earnings sources, as well as a balance sheet. The balance sheet should outline your personal assets and liabilities and gives the lender an idea of your current financial responsibilities.
Finally, pull together a detailed business plan — a good idea for your lender, but also for yourself.
There are many different formats you can use, so pick the one that best represents your business goals and how you plan to reach them.
If you already have a small business or existing franchise, you can also include the financial information on that venture, such as a profit and loss statement. Gathering all of this information ahead of the franchise loan application process can expedite your approval time.
It also shows that you’re organized and prepared, two important traits of a successful business person.
Where can you get franchise business loans?
There are a wide variety of franchise financing lenders, particularly among popular online loan companies.
Going this route can often be much quicker than choosing a traditional bank or credit union because they have much better application analytics.
To start off your search for the best franchise lender, consider some of these popular online lenders.
Lending Club has been around for ten years and offers an average interest rate of 13.81%.
Your exact interest rate depends on the strength of your application, particularly your personal credit score.
The approval decision process takes a matter of minutes and no matter what the outcome is, your credit score won’t be harmed.
If your loan amount is small enough (under $100,000) you don’t have to provide any collateral, making it a great option for first time borrowers.
Another option for financing is OnDeck, the largest online lender.
It has great customer support during the application process and beyond, which can be helpful for a business owner with any level of experience.
Loan amounts can be as much as $500,000 so if your chosen franchise is a more expensive one, you have the flexibility to qualify for more financing.
You can choose from a wide range of repayment terms and APRs run the gamut from 8.5% all the way up to 79%.
No matter what financing option you choose, get ready for the start of an exciting journey into the world of franchising — best of luck!