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Understanding
Franchise Financing
Franchise financing refers to the specialized funding options and strategies designed to support entrepreneurs and business owners in acquiring, establishing, or expanding a franchise business. This type of financing often involves partnerships with financial institutions or franchisors, providing capital for franchise fees, equipment purchases, real estate, and operational expenses. Franchise financing solutions cater to the unique needs of franchisees, considering factors such as brand reputation, business model, and growth potential, while ensuring a structured approach to funding the establishment and ongoing operations of the franchise.
how to
Effectively Apply Funds
Franchise costs are usually an all-in-one, though the location the franchisee chooses may impact the total cost of the startup as well as the estimated foot traffic the business can receive, resulting in variable returns on investment. The Franchisor has a list of equipment and goods necessary at the time of launch and often includes a design and build fee to finish your rental or real estate purchase to the specifications of the brand. Lenders will look at the budgetary breakdown and will lend based on the total cost of the franchise, minus expected down payment. Franchisees may need additional working capital financing to cover restocking, payroll and other fees while the business prepares for launch.
Franchisors often have preferred lenders, but that may not be a franchisee’s best option. With a variety of SBA-backed lenders providing franchise funds, as well as private lenders that specialize in various franchise business funding, there are an array of sources. Brokers are often able to source funds at better rates or with better terms than what is offered through the franchisor.
Franchise Financing Options
SBA Backed funds
The Small Business Administration is willing to back franchise costs, but they take a careful look at the financial plan resulting in added time from application to approval. There are also some franchises they choose not to finance. Our team will help you navigate the SBA process to determine if it’s right for you.
Private Lending
Private lenders back a broad array of franchises with less time involved between approval and launch, however, it’s important to assess repayment timelines and terms to verify cash flow will effectively support the business, provide a return to the owner, and cover the cost of financing.
Equities and rollovers (ROBS)
Before an individual can be approved for a franchise program they usually need to demonstrate assets to support and back their endeavor. One way to back the launch of a franchise is with funds drawn from a retirement or other investment fund.
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FAQS
Q. Why work with a broker on financing a franchise?
Our team doesn’t simply stop once they’ve sourced a single option. They work the range of financing pathways to find you the best deal – the most for your money and the best return on your investment. While traditional lenders and franchisors provide one option, we take into account your entire financial picture and give you insights into how financing can support your franchise.
Q. Should franchise equipment be leased or purchased?
Franchisees may not have an option in what types of equipment they use. For example, many food establishments require the same equipment from franchise to franchise, helping to assure consistency in flavor, quality and experience. However, you may have the option to buy or lease, and there are a number of parameters, based on your scenario, that help to determine which is right for you.
Q. When is the right time to work with a broker on practice financing?
Once you have inquired with a company about becoming a franchisee and have a sense of costs, the categories of expense the money will cover (equipment, goods on hand, rent, property improvement, licensing fees, payroll, and similar), you can begin sourcing funding. It is common to provide 10-30% down, and you may also need to maintain cash reserves in addition to money in at the time of launch. Most franchisors provide a training and onboarding program, so franchisees will often make an initial payment and begin the program before the full amount is due. The sooner you work with a broker, the more options you have on the table and the less you are squeezed to make financial decisions under time pressure.
Q. How long does it take for franchise financing to close?
Because franchise financing covers a range of costs from hard assets to goods on hand, lenders may take up to 90 days to finalize funds once an application has been submitted. The best way to proceed is to start as soon as possible. That way your broker can shop the market, discuss options and pathways to financing, and to take the time to evaluate prior to making a funding decision.