Starting a franchise can be an exciting and financially rewarding experience. However, as you think about your franchise, the first thing that probably comes to mind is how you will finance it. The good news is, there are plenty of financing options available for individuals who are interested in a franchise business. With that said, knowing the options that are available to you will help you start your business on the right foot. For this reason, we’re going to discuss 3 options you should consider.
One of the first, and probably the easiest, places you can begin to look for financing is directly through the franchisor. In fact, most corporations with franchise businesses have financing options for those interested in becoming franchisees.
Generally, the franchisor will provide funding through partnerships they have set up with specific lenders, or the franchisor may become a lender themselves if the corporation has the capital.
Getting financed through your franchisor is a great option primarily due to the convenience it provides. Aside from funding, you can get other help for your budding franchise. For instance, depending on the corporation, you can get assistance with things such as location selection, training, advertising, and administrative support.
This is a really great route to go, especially if this is your first time operating a business. By going in this financing direction, you not only will get the capital you need to get up and running, but you may receive assistance with other vital areas that are needed for a successful launch.
It’s important to emphasize that not all franchisors offer financing to their franchisees, so be sure to check with your franchisor to see if they provide this assistance.
An SBA (Small Business Administration) loan is part of a federal program. The SBA works with lenders to provide loans to small business owners. It’s important to note that the agency does not lend money directly. Instead, they focus on setting the guidelines that businesses need to follow for loans that are made for their partnering lenders.
One of the benefits of an SBA loan is that it allows for projection-based underwriting. This essentially means that prospective franchise owners can get the capital they need based on profitable estimates.
Another great thing about obtaining an SBA loan is that it is generally favorable towards prospective borrowers. For instance, these loans often come with competitive rates and fees, lower down payments, and flexible overhead requirements. Depending on the loan you get, you can even receive counseling and education to support you in your business venture.
Commercial Bank Loans
A traditional term loan is a common route that many businesses consider when looking for financing options. A commercial loan is a debt-based funding arrangement between the business and the bank. Essentially, you would borrow a certain amount of capital for your franchise and then pay back the loan with interest added on a set payment schedule.
This is a great option for franchisees because commercial bank loans often have lower interest rates that make them more affordable. However, keep in mind that to get approved for a bank loan, you will need to have excellent credit. Commercial banks typically do not like risky investments in the small business space, so it may not be easy to obtain this kind of loan.
If you’re preparing to open a franchise or thinking about opening a franchise, your primary focus is more than likely funding. Although the road to obtain funding can sometimes feel discouraging, it is certainly possible. As you embark on your franchise adventure, it’s a good idea to be aware of the loan options you have available to you. If you have any additional questions about financing your franchise or want to know how we can help, reach out to RidgeStone today for help with your franchise funding.