how to finance a franchise business

1. Online Loan Platforms. The goal of online loan platforms is to match borrowers to lenders. ...
2. Leasing. The leasing option would be a great way to finance a franchise if the franchisor has movable assets that can be put to use.
3. Small Business Administration Loans. Small Business Administration (SBA) loans are another good place for financing a franchise. ...
4. Cash. “Cash is king” like they say. The cash option remains a valid means of financing a franchise. ...
5. Commercial Bank Lending. A loan from commercial banks is good for financing a franchise. ...
6. Franchisor Financing. Franchisors also offer their own financing options for their franchisees, especially fast-growing franchises although not all.
Special Franchise Financing Companies. There exist special companies that make their business from franchise financing. They make financing available to new franchisees directly or match franchisees to ready lenders.

Full Answer

How to raise money to finance a franchise?

• Begin at the beginning. Before you choose a franchise to partner with, before you even begin to shop for your ideal franchise, it’s a good idea to determine your current ...
• Try talking to the franchisor before seeking funds elsewhere. ...
• Getting funding is an exercise in risk management and tolerance. ...
• Some food for thought. ...
• You can do this. ...

Can I make money with a franchise?

When it comes to making money franchising, and if your franchise program is built right (hint, hint), you may have additional sources of revenue built into your franchise program.

How to get financing to buy a franchise?

What is the Best Way to Buy a Franchise?

• 401 (k) Business Financing. Even better, ROBS allows you to finance your business without debt, early withdrawal fees or tax penalties.
• Small Business Administration Loan (SBA Loan) An SBA loan is a government-backed loan aimed at helping American entrepreneurs fund their businesses.
• Other Ways to Fund Your Franchise. ...

How to find funds to launch a franchise?

Part 1 Part 1 of 3: Considering Your Funding Options Download Article

1. Seek franchisor financing. Some franchises will lend you the money needed to purchase a franchise. ...
2. Tap your retirement accounts. You can use retirement accounts such as your 401 (k) or IRA to fund the purchase of a business.
3. Pull equity from your home. ...
4. Find business partners. ...
5. Pursue traditional bank loans. ...
6. Consider SBA loans. ...

Can you get a loan to franchise a business?

Commercial lenders, the SBA, and some franchisors offer funding to buy a franchise. Some SBA loans provide funding up to $5 million for a franchise. To qualify for a franchise loan, you must meet credit and collateral requirements.

How much do you have to put down on a franchise?

Entrepreneurs looking to finance a franchise transfer typically need to put 20% down, while a new location or start-up business requires 25 – 30% down.

Can I use an SBA loan to buy a franchise?

SBA 7(a) loans for franchises Franchise owners can use this loan for purchasing real estate, fixed assets, working capital and even refinancing existing debts. With amounts available up to $5 million, business owners can use it as a loan to start a franchise and cover initial startup costs.

What is the most profitable franchise?

Top 14 Most Profitable FranchisesMcDonald's. Units in operation: 39,360. ... Dunkin Donuts. Units in operation: 12,800. ... Taco Bell. Units in operation 12,800. ... Subway Franchise. Offers Financing: Yes. ... Anytime Fitness Franchise. Units in operation: 4,904. ... Sonic. Royalty: 2.5% - 5.0% ... Planet Fitness. Royalty 7.0% ... Orangetheory Fitness.More items...

Do you need cash to open a franchise?

Can you open a franchise with no money? Opening a franchise requires an initial investment. If franchisees don't have the cash to cover the franchise licensing fee and other startup costs, they will have to apply for a loan with the franchisor, a bank or some other lender.

What kind of loan do you need to start a franchise?

Small business loans offer great rates. While that answer varies depending on your situation, if you're exploring opening your first franchise, Small Business Administration (SBA) loans are a good choice.

Is it easier to get a business loan for a franchise?

Franchise owners benefit from online franchise loans, which have less-strict borrower qualifications than traditional business or SBA loans and put the funds in your account a lot faster. Generally, online loans have higher rates than bank loans.

How much do I need to put down for an SBA loan?

10%Do SBA loans require a downpayment? Yes, the minimum SBA loan down payment requirement is 10% on 7(a) and 504 loans and is based on a business's cash flow and collateral. Weak cash flow or low-value collateral can increase the down payment requirement to up to 30% of the loan amount.

Can you get rich owning a franchise?

The bottom line is that while a franchise can make you independently wealthy, it isn't a guarantee. Choosing the right business in the right industry, and going in with preexisting entrepreneurial experience and/or existing wealth can help, but your income-generating potential may still be somewhat limited.

How profitable is owning a franchise?

Buying a franchise might seem like easy money, but those royalties and fees will quickly cut into profit margins. The majority of franchise owners earn less than $50,000 per year.

Is owning a franchise a full time job?

Buying a franchise doesn't have to mean making a full-time commitment. Believe it or not, there are many franchises that can be run on a part-time basis, especially when you first start out.

How much does a McDonald's franchise cost?

McDonald's franchisee applicants must have a minimum of $500,000 available in liquid assets and pay a $45,000 franchise fee. Those looking to launch a new McDonald's franchise can expect to shell out between $1,314,500 and $2,306,500. Existing franchise prices can cost upwards of $1 million or more.

What are the costs of opening a franchise?

The costs of opening a franchise vary depending on the franchise and the requirements set forth under the franchise agreement but may range from $7...

Do franchises offer financing?

Franchises may offer several tools to help franchisees fund their new business ventures. In-house financing is offered by some companies, but it’s...

Is it hard to buy a franchise?

Buying a franchise can be difficult without access to the cash necessary to do so. High startup costs can be difficult to fund without strong perso...

8 Types of Franchise Funding

If you’re wondering how to finance your franchise efforts, here are eight funding sources that may be an option:

How Does Franchise Financing Work?

Most franchisees use franchise financing to pay for startup costs and business expenses. Since these fees can easily cost tens of thousands of dollars, most franchise owners can’t cover them out-of-pocket, and franchise financing makes the most sense.

How To Qualify For Franchise Financing?

While there’s no one-size-fits-all rule for qualifying for franchise funding. Ultimately, decisions are always up to lenders, but good loan candidates share a few traits:

Franchise Funding is Within Reach!

While franchise funding options can feel confusing and daunting, they’re not as tricky as they seem. Follow the tips in this article to secure your franchise funding, or visit our franchise funding guide to learn more about the process.

Best Franchise Financing Options

Just as there are several types of business loans, business owners have several options when choosing franchise financing. That said, some types of funding are more appropriate for first-time franchisees, while others are best for those trying to grow their existing franchise business or who need assistance with operating costs.

Tips for Comparing Franchise Financing Options

The best franchise financing option depends on the unique needs of the business owners. For that reason, it’s important to evaluate financing types and lenders to determine the best fit. Consider these factors when comparing franchise financing options:

What Is Franchise Financing?

Franchise financing is a type of loan that helps prospective business owners fund the purchase of a new franchise. Traditional business loans can be used to buy a franchise, but some loans and lenders are better suited to this type of business venture.

How Franchise Financing Works

Franchise financing lets business owners finance the initial startup of a new franchise location or expand an existing venture. To finance a franchise, business owners can access funds directly from the franchisor or work with an online lender or other financial institution.

How to Apply for Franchise Financing

The process of getting a business loan varies depending on the franchise, type of financing and lender. However, there are a few general steps you should take to obtain the money needed to buy a franchise. Follow these steps to apply for franchise financing:

What is the next franchise finance solution?

The next franchise finance solution you’ll want to consider is an SBA 504/CDC loan.

What is the best loan for franchise?

Therefore, you’ll find that overall, the best franchise loans are SBA loans or loans from alternative lenders. With either of these options, you’ll find convenient and accessible financing, that you can use to support a number of different purchases within your franchise business operations.

What is the most popular SBA loan program?

To start, the SBA 7 (a) loan program is the most popular SBA loan program and a great option for franchise finance.

How long is a funding circle loan?

Funding Circle offers medium-term loans in amounts from $25,000 to $500,000 with terms of six months to five years. Interest rates on Funding Circle loans start as low as 4.99% and can go up to 22.99%.

Can you finance franchise fees with SBA 7A?

This being said, however, it’s important to note that SBA 7 (a) loans cannot finance ongoing franchise or royal ty fees.

Does a franchisor offer funding?

Some franchisors offer straightforward business loans, some offer down-payment contributions, and some might offer reduced royalties or licensing fees if you open multiple branches.

Does Ondeck finance franchises?

Although the majority of OnDeck’s small business lending happens outside the franchise space, they’re committed to providing more and more franchise financing for business owners who need the capital to grow.

How does SBA loan work?

SBA loans are very similar to conventional loans from a bank. They are backed by the Small Business Administration and are a very common option for people navigating how to finance a franchise. The main difference between SBA and conventional loans is that a portion of the loan is guaranteed to be paid back to the lender. With that safety net in place, lenders are often willing to reduce interest rates on your conventional franchise and offer longer loan terms. You’ll need a good credit score and solid financial standing to be approved.

What is a conventional loan?

A conventional loan is a loan from a bank that can be used for a variety of things. When deciding how to finance a franchise, many people choose this route as it can seem the most straightforward. However, you will need a good credit score, a solid business plan, and collateral, all of which the bank will take into consideration before offering you a loan. If you have a good amount of equity or value in your house—and you’re willing to go the distance for your conventional franchise–you could also consider a home equity loan if you’re willing to take the risk of using your own home as collateral.

Can a franchisor finance a franchise?

In many cases, a franchisor will be able to offer you franchise financing options for all of your costs including the franchise fees, equipment, and marketing resources.

1. Franchisor financing

If you need funding to purchase a franchise, your first conversation should be directly with your prospective franchisor.

2. Commercial bank loans

Another common way of financing your franchise is through a traditional term loan from a bank. A term loan is what most people think of when they think of any form of loan financing, especially if you've ever taken out a student loan or home mortgage.

3. SBA loans

Of all the loan products on the market, one of the most desirable option for aspiring franchisees tends to be the SBA loan. SBA loans are loans and funded by their intermediary lending partners.

4. Alternative lenders

If you need money to fund your franchise quickly or want to secure additional capital to supplement your commercial or SBA loan, you may want to consider applying for franchise lending through an alternative lender.

5. Crowdfunding

If franchise financing isn't available and bank, SBA, or alternative loans don't pan out, obtaining financing for your franchise may require some creativity. One of the newer and more creative ways of financing a franchise is through crowdfunding.

6. Friends and family loan

Believe it or not, one of the most common ways to finance a franchise is by borrowing from your friends and family.

Entrepreneur Editors' Picks

When His Grandfather's Farm Was Destroyed By an Invasive Plant, This 17-Year-Old Entrepreneur Came Up With an AI-Powered Solution

What is a robs business?

40 1 (k) business financing, otherwise known as Rollovers for Business Start-ups or ROBS, is a financing option that allows you to tap into your 401 (k), IRA or other eligible retirement account as capital to purchase your franchise location. Even better, ROBS allows you to finance your business without debt, early withdrawal fees or tax penalties. This solution is most commonly used by individuals who do not have the cash on hand to outright purchase the business – which is the case for most of us, let’s be real.

How long does it take to get a working capital loan?

A working capital loan is a great option for entrepreneurs who are looking for $25,000 to $150,000 in order to operate the business – hence “working capital.” These loans have a lower interest rate and can close much faster than other financing alternatives, sometimes in as little as 6 weeks. They differ from 7 (a) loans in a lack of down payment or collateral requirements, among other things.

Why is the SBA loan important?

An SBA loan is a government-backed loan aimed at helping American entrepreneurs fund their businesses. The Small Business Administration is not directly lending funds to entrepreneurs – instead, the SBA gives a guarantee to the bank that if the entrepreneur defaults on the loan, the SBA will pay back at least part of the loan. So, the bank is lending you the money, and the SBA is backing that loan up. Why is that necessary? Because small business loans are viewed as a riskier investment for a bank. However, the bank’s management can feel much more confident they’ll get their money back if the government is guaranteeing the loan – which is exactly what the SBA does.

Is a down payment required for a franchise?

Now, about that down payment requirement: this particular loan can be an excellent choice for some franchisees, as the down payment is a full one-third smaller for an existing business than it is for a brand-new start-up. However, this applies to individuals who are purchasing an existing location from a current franchisee – not building out a whole new one. Buying an existing franchise is called a transfer, and this is the type of franchise purchase that the SBA likes.

Do franchisors have a pool of financing companies?

As you begin to narrow down which franchise brand you’re interested in, the corporate team will also be a solid resource for you. Often franchisors have a pool of financing companies and options that they suggest, and some (like we mentioned in the unsecured loans section) that they prefer you avoid. And, as per usual, we highly recommend that you speak to a professional to make sure your decisions are fully informed.

Find Legal Answers For Your Small Business

Nolo offers hundreds of consumer-friendly do-it-yourself legal products written in plain English.

What Is a Franchise Business?

A franchise business is a business where the owner grants licenses to licensees to operate the business (sell its products, provide services, and more) at a business location. Think of Baskin-Robbins, CrossFit or another business that you’ve seen in multiple cities.

Franchise Pros and Cons

The great advantage of a franchise is not starting from scratch. You have the branding and design concepts ready to go, and you get to focus on the important operational aspects of the business.

How To Start a Franchise in 8 Steps

There are several steps to start a franchise after you decide to pursue this business. From picking to getting a license to securing space, you have to plan this process ahead of time to stick to the franchisor’s standards.

Find Legal Answers For Your Small Business

Nolo offers hundreds of consumer-friendly do-it-yourself legal products written in plain English.