Franchise Financing

Franchise Financing: The Ultimate Guide

Franchise owners need to pay a franchise fee and royalty payments when they establish their new business. Franchisees thus need a solid business approach, good cash flow, and reliable financing.

Financially Reviewed by Somer G. Anderson

At a glance  As a franchise owner you may have the freedom of owning your own business with the added advantage of being associated with an established entity. Nevertheless, as with creating any new business, establishment costs can be lofty, and you could need extra capital if you stumble upon difficult periods. This page will help you find the right loan for your franchise business.

Insights Into The World of Loans for Franchises

Start-up costs for owning a franchise can vary from thousands to a few million dollars for some of the more popular franchises. While many franchises will require a franchisee to have a substantial net worth, one can purchase a franchise for $50,000 or less.

The franchisor will charge an initial franchise fee or license fee. Also, there will be a royalty payable based on the franchised outlet's financial performance. Besides this fee and costs, you may be restricted to selling only the stock or goods supplied by the franchisor.

This article explains various business loan types out there for prospective franchisees to consider and adopt.

The Best Franchise Financing Options

The following table outlines the top options available for franchise financing. 

CompanyMax/Min LoanLoan RatesSpecial RequirementsGet a Loan

Smartbiz

Full Smartbiz review

Commercial Real Estate: Up to $5 Million

Business Capital: Up to $350,000

Bank Term Loans: Up to $500,000

Prime Rate plus: 1.5% to 2.75% for loans up to 10 years.

Medium term non-SBA loan: 7.99%

  • Established Franchise.
  • 2 years+ in Business.
  • Positive Cash Flow.
  • Good Personal Credit.
Apply Now

OnDeck

Full OnDeck review

Short Term loan: up to $250k.

Line of Credit: up to 100k.

Term loans: APRs start at 9%

Lines of Credit: 19.9%

  • 12 months in business.
  • credit score of 600.
  • annual revenue of $100K.
Apply Now

Funding Circle

Full Funding Circle review

Up to R500k 

Relatively low rates: Medium term loans, SBA loans, Standard term loans, Lines of credit.

Higher rates because of higher risk: Merchant cash advances, Short-term working capital loans, and Invoice financing

  • 2 years in business.
  • Credit score of 660
  • 6 months in business
  • Credit score of 500
Apply Now

Credibly

Full Credibly review

Merchant cash advance or short term loan: Up to $400k .

Medium term loan: up to $200k

Cash advance or short term loan: starts at 15% for

Medium term loans: between 10% and 36%

Short Term:

  • Revenue of $15,000 pm.
  • Credit score of 500+.
  • in business for 6 months.

Medium Term

  • Credit score 600+
  • In business for 3 years
Apply Now

BlueVine

Full BlueVine Review

Line of credit: Up to $250k for 6 or 12 months

Invoice factoring: up to $5 million

6 months: 0.3%-1.5% per week ()

12 months: 1.5%-6.5% per month

Invoice discount rate: 0.25%-1.7% per week 

Your credit score is a consideration, but BlueVine also looks at various other factors.Apply Now

Note: BlueVine, has currently suspended its normal business financing options to offer only PPP loans.

What is Franchise Financing?

A franchise is a joint venture between a franchisor and several franchisees. The franchisor is an original, successful business that sells the right to use its name, ideas, and products. The franchisees buy this right to trade under an existing business model.

Franchise financing is a term given to the process of securing a loan for getting your franchise business started. More prominent brands assist these individual stores with trade secrets, marketing, business plans, and other resources to help them succeed.

While franchises are an excellent way to ensure that you have a solid business plan in place, buying into these businesses can be expensive.

How Much Does It Cost to Start a Franchise?

Buying into a franchise can be costly. The following are the costs that you should expect.

  • Initial franchise fee: an initial fee is payable to the franchisor for the purchase of your business. 
  • Recurring franchise fees: these are often referred to as royalties, which are ongoing fees that you'll pay (usually monthly) to the franchisor as part of the original agreement. 
  • Marketing fees: the franchisor will most likely take care of the marketing for the brand as a whole.
  • Required purchases: franchisors may require that you purchase certain goods or services for use within your store. 
  • Build out costs: Once you have secured your franchise outlet, you will have to pay initial rental plus a deposit, start renovating your premises, shopfitting, and so on.
  • Hiring costs: there will be costs involved with the hiring and training of employees.

Things to Know Before Taking Out Franchise Financing Loan

Franchise loans are available for franchisees, but it's essential that you come armed with the following before approaching franchise financing lenders or a franchise financing company itself.

  • Business and Personal BudgetsYou will need to budget for the usual business expenses such as rental for the business premises, stock, salaries and wages, insurance, and other overheads. Then you must cover your salary and set an amount aside for unforeseen expenses. Set your goal for breaking even in the first year.
  • Your Personal Net WorthNet worth refers to how much capital you can access to invest in your franchise and tells franchisors and those in the franchise financing business how well you have managed your money historically. 
  • Financing Options: Do your best to know more or less what your financing needs and options will be. We will discuss these options in the next section.
  • Time to Profitability: The franchisor and other franchisees in a chain should know how long it takes to become profitable. Speaking to them should give you a fair indication for inclusion in your forecasting.
  • Developing Relationships: One of the biggest causes of franchise failure is because would-be franchisees go into a business with their eyes closed. We suggest that you develop as close a relationship as possible with the franchisor and the bank or lender that will finance you.

Five Ways to Finance a Franchise

The following are five different types of small business loans for a franchise.

1. Bank Loans

You will probably find that a successful franchisor's bank will be open to financing franchise opportunities based on its franchise client's track record.

Banks, however, tend to require more substantial documentation and will look at the prospective owner's credit rating and any other business credit ratings more closely.

A bank also tends to require self-contribution from a prospective franchisee and consider any available collateral.

2. SBA Loans

Another possibility is raising a loan guaranteed by the Small Business Administration (SBA). These loans typically offer attractive rates and terms. You should note that the SBA itself does not make loans, though.

Instead, it partners with a financial institution that makes the loan; then, the SBA undertakes to repay a significant portion thereof in the event of default.

3. Retirement Funds

Should you have a 401(k) or 403(b) retirement account, you might be able to borrow against it to fund a business—including a franchise. 

There are many restrictions against using retirement funds for anything other than retirement, so be careful and seek a tax professional's guidance when considering this option.

4. Small Business Credit Card

Small business credit cards can be another road to take. They often provide high credit limits, which could make it possible to finance a low-cost franchise with a balance transfer—where the funds are deposited into your business bank account.

This carries its risks, of course, meaning that you could be looking at exorbitant interest rates on your outstanding balance. If handled properly, it could provide you with a good business credit rating further down the line. 

5. Franchisor Financing

Two weeks before you purchase a franchise, the franchisor must provide you with a Franchise Disclosure Document (FDD). This document should contain any information about whether the franchisor offers to finance or may finance through one of its established lending partners.

Final Thoughts 

Finding the right franchise financing option is essential to a successful franchise business. In this guide our experts have outlined the top options available for franchise financing. Now all you need to do is choose the right option for your franchise business - and embark on your franchise journey. Best of luck!