How to Get Funding to Open a Franchise
So, you’ve decided to ditch the 9-5 job system and become an entrepreneur by opening a franchise. You are all pumped up for the opportunity ahead only to be hit by the F-word, Funding. This is when you find out why most people prefer being employed because heading down this road takes courage and perseverance.
Note that a successful person is just an entrepreneur who didn't quit after starting this journey. Therefore, you too shouldn't worry about getting financial assistance for your new idea, but you should be concerned.
And we assume that’s why you are here to learn how to fund a franchise business. To simplify the process for you below is how to get funding to open a franchise.
1. Franchisor Financing
Your prospective franchisor should be the first option when you need funding to open a franchise. This is because some franchisors help their prospective franchisees with tailored financial solutions.
They can do this through the following means:
- Partnerships with specific lenders
- Providence of capital directly from the corporation
Franchisor financing is one of the most common and effective ways of getting funding for a franchise. Moreover, this way usually comes with multiple benefits compared to other sources of financial aid.
Other than financial solutions, franchisor funding can also be your one-stop-shop for everything you require for starting your franchise. This includes the purchase of equipment and different materials that you need to launch the franchise.
However, ensure you have an accountant or personal business attorney review the terms of the financial aid from your franchisor before proceeding with the plan.
2. Commercial Bank Funding
After franchisor funding, commercial bank loans are the second most common way of how to fund a franchise business. This is the traditional term loan from your bank and it’s usually the first stop for most entrepreneurs who need funding for opening a franchise. With this funding model, your bank can offer you a large sum of cash upfront.
Afterward, you are expected to pay the loan at an interest rate through monthly installments over a set period. When applying for this type of funding, your banking provider will want to review your business plan as well as your personal credit history.
The aforementioned information is what your bank will use to determine if you are worth the loan. Therefore, it’s ideal to have a good personal credit history and a well-designed business plan for the franchise.
There are a lot of resources for putting together a business plan that will greatly increase your chances of approval. This online course gives you plenty of examples, templates and support from experienced professionals.
This short 25-minute video goes over how you can obtain funding for your business. You may find the information it shares to be beneficial as you explore your financing options.
3. Alternative Lenders
With this approach, you don't necessarily depend on the alternative lenders for all the financial aid of opening a franchise. Instead, you can use money acquired from this source to supplement the bank loans, SBA loans, or franchisor finance. Typically, these types of lenders have shorter turnarounds and less strict requirements than other financing options.
Alternative lenders can also offer you different loan options to suit your exact financial needs. These include the following:
- Equipment financing
- Event term loans and
- Business terms of credit
However, alternative lenders still have their fair share of negatives that make them less preferred compared to other means of financial solutions. While they might offer you convenience and fast access to the funding, these sources usually have shorter payment terms, lower loan amounts, and are more expensive to repay.
But if you are looking for funds to supplement your current financial aid or to quickly indulge yourself in a life-changing opportunity, alternative lenders can be your answer.
4. SBA Loans
SBA loans tend to be the most preferred means of getting funds to open a new franchise. Aspiring franchisees prefer this type of loan because SBA loans are partially backed by the United States Small Business Administration. Additionally, these loans are funded by the government’s intermediary lending partners. SBA usually reduces the risks to lenders by guaranteeing them payment on a portion of your loan.
As a result, SBA organizations usually offer more loans with lower than usual interest rates and a longer repayment period as well. So, if you want to know how to get funding for a franchise business, then SBA loans are the most preferred way of acquiring the funds.
But like most lending organizations, you still require to deliver your financial information including your current credit score. These will ascertain whether you are eligible to get the funding for your new business or not.
Another way that you can also acquire funding for your franchise is through the use of crowdfunding. Crowdfunding is a creative way of raising funds for your business, especially if all the four ways explained above aren’t available for you.
In this age of the internet, you can either promote your crowdfunding page to raise money for your franchise. There are a lot of great crowdfunding websites to raise money on, each has different rules and requirements. One platform you can check out is Krowdster.
Besides that, there are also specific organizations that you can use to facilitate the crowdfunding process for your business on your behalf. However, ensure that such organizations or websites have a good reputation and proof of results before trusting them with your idea.
If you strike a good deal, crowdfunding can be the supplementary funding you need if the traditional loans, SBA loans, or offers from alternative lenders don't match your financial needs.
Requirements on Getting Funding for Your Franchise
Like mentioned earlier, all lending sources have several requirements before they can approve your loan application. And it’s usually these requirements that determine whether you’ll get the financial assistance to start your franchise or not.
That said, here are some of the requirements that you can expect when applying for financial assistance when opening a franchise:
- Other business or personal financial information
- Personal credit
- Business plan
These are the most analyzed financial information by any lending institution because they want to understand how you use money and repay debts.
Therefore, you need to have a decent credit history and financial information if you want to secure the best loan amounts and terms for funding your new franchise. This will ensure that your franchise is stable and can be able to withstand the initial stages.