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    Your Guide To Franchise Financing

    Edward D. - 2020-05-07T21:00:00.000Z

    A franchise refers to a business arrangement where a parent company allows you to use its name and products. The key benefits of opening a franchise include the ability to grow rapidly, the possibility to leverage a well-established brand name, and the minimization of marketing efforts. 

    However, opening up a new franchise is not a straightforward task. It involves a lot of meticulous planning and obtaining access to resources. You may need to look into startup business loans to secure the financing to set up a new franchise. 

    Read on to take a walk through the key aspects of franchise financing and uncover the different scenarios where it could make sense.

    Starting A Franchise

    Here are a few steps that you need to follow in order to start a franchise:

    1. The first step is to evaluate your skills and resources and pick a particular franchise model that suits these abilities. This step should involve a lot of research.
    2. The next step involves holding preliminary discussions with your potential franchisor regarding your plans and ambitions.
    3. Thereafter, you need to identify a suitable location that serves your needs. This location must be chosen on the basis of your target market.
    4. You will also likely need to secure franchise financing and sign the final agreement with your franchisor. You may also need to obtain permits.

    The Costs

    Franchise engagements are protected by formal agreements between the two parties. These agreements contain information related to various aspects, including the fee structure. There are different types of costs involved in franchise financing, including the following:

    • Franchise Fee - This is the amount that you pay to your franchisor upfront. This fee is usually non-refundable, and you should only pay it once the agreement is finalized.
    • Royalty Fee - For using the company’s brand and more, this fee is paid to the franchisor on a recurring basis. This fee varies according to the franchisor but is typically a fixed percentage of your sales.
    • Advertising Fee - To cover the advertising expenses incurred by the franchisor, this fee is usually collected on an annual basis and charged in the form of a fixed percentage of your sales.

    Where To Find Financing To Open Your Franchise

    Finding the appropriate type of financing can be a complex task for small businesses. Here are a few options that you should explore:

    • Borrow From A Franchisor - There are multiple franchisors that provide support to their franchisees by offering them loans. If your franchisor offers such loans, they would usually state it on their website. Still, you need to compare terms of the loans offered by different franchisors before choosing to proceed.
    • Franchise Financing Companies - These are specialized lenders that are dedicated to certain franchise operations. For example, a franchise financing company by the name of Franchise America Finance helps the franchisees of FastSigns obtain the necessary funds to get set up.
    • Online Secured Loans From A Traditional Bank Or Small Business Administration (SBA) - This option demands that your credit history and documentation would meet the stringent criteria that are set out by the bank. For female franchisees, specialized small business loans for women could possibly help secure lower interest rates.

    When Your Are Just Starting Out

    First-time franchisees should look out for the following when just getting started:

    • First-time applicants need to be sure that they have all documentation about their creditworthiness available along with a business plan. The application process might take slightly longer when compared to established franchisees.
    • The loan amount that you are seeking should be a smaller one that will ideally be used to cover capital expenses.
    • You need to be sure about the repayment terms. Depending upon the type of franchise financing that you opt for, you may have to consider paying out from your monthly sales.

    For Established Franchises

    Experienced franchisees should note:

    • The application process is likely to be much smoother because you already have a financing history and track record.
    • If you are an existing franchisee, then you may want to obtain a larger sum of money. This is because you may need additional funds in the form of equipment financing.
    • You should compare the interest rates that you would be paying. Borrowing a higher amount could lead to an increase in the interest obligation as the lender takes on more risk.

    Conclusion

    After uncovering the key aspects of franchise financing, small business owners can get the kick-start they need to build a successful business from this type of financing. Before signing, you just need to make sure that you have reviewed all the fine print and are dedicated to running a thriving business.