If your heart is set on becoming a franchisee, there are various franchise funding options available. More than ever. Thatโs because the franchise business model is widely recognized now, with over 830,00 establishments in the US. So, lenders are showing more confidence in funding these ventures. The key is finding the right option that fits your goals, budget, and long-term plans.
Download our business model overview to get a better idea of our mobile cleaning opportunity, a great first step to exploring franchise startup loans.
Ways to Get Funding for a Franchise
Franchisor Loans
Talk to your prospective franchisor first. Or find out if they offer in-house financing by checking their website or looking at the franchise disclosure document (FDD). Depending on the in-house financing agreement, franchise loans may cover:
- Franchise fees.
- Royalty fees.
- The lease on the premises.
- Equipment.
- Working capital.
Even if your franchisor doesnโt provide financing for your entire loan, they may be able to connect you to trusted third-party lenders. Ask about recommended financing options, such as SBA (Small Business Administration) loans, see below. For example, DetailXPerts is an SBA-approved franchise.ย
Small Business Loan for a Franchise
You can look into an SBA loan for franchise startups. Unlike traditional bank loans, the SBA doesnโt require an established relationship with the borrower. ย This makes it easier and more accessible for new and small business owners.
Benefits of the SBA program: ย Theyโre designed to help you secure financing at competitive interest rates with longer repayment terms. Also, loans are partially guaranteed by the federal government. Therefore, lenders face less risk if a borrower defaults.
Commercial Bank Loan
A commercial bank loan is one of the most common ways to cover your funding for a franchise startup. You borrow a lump sum and repay it over time with interest. It helps if the bank is familiar with the franchise brand and confident that it is a reputable business model.
Compared to other franchise financing options, banks often come with lower interest rates with longer repayment terms. ย However, lenders carefully review your financial history and credit score. ย Youโll also need to provide key documents such as personal financial statements, tax returns, and proof of available funds for your down payment.
Before you apply, review your franchise agreement carefully. It outlines all the financial details that lenders may ask about during the approval process.
Rollover for Business Startups (ROBS)
This is a popular option with many small business owners. Financing a franchise can be done by using money from your retirement account through a rollover for business startups (ROBS). This allows you to use funds from a 401(k) or a traditional IRA without paying early withdrawal penalties or taxes. Unlike traditional business loans, you donโt have to worry about a repayment schedule or interest.
Many entrepreneurs choose ROBS funding because it gives them immediate access to capital and doesnโt impact their credit score. However, every ROBS setup is unique, and compliance with IRS and Department of Labor regulations is critical, so itโs important toย work with a qualified ROBS provider or financial expert.ย
Typically, youโll need at least $50K in your account. Setup costs vary, and you may be charged an initial fee, so go over the numbers carefully.
Securing Funding with Lower Interest Rates
Research on small business trends highlights that interest rates are one of the top challenges for small business owners. If you go to an alternative lender, youโre more likely to pay higher interest rates than traditional banks.
The average interest rate depends on the individual lender, your creditworthiness and the size and term of the loan. Bear in mind, if you opt for a franchisor loan, they wonโt necessarily offer you the best interest rate. You should also:
- Find out if there are any additional fees.
- Calculate the true cost of the loan. Use an online calculator to work out monthly loan payments over the loan term (for example, five years).
- Go loan shopping. Make sure you get the best deal.
- Bring your franchise consultant to the conversation. They can help explain loan offers and give an overview of the industry.
Bear in mind, franchisors donโt want you to pay sky-high interest rates. Theyโd rather every spare dollar go into your business so you can turn a profit. Therefore, some franchisor loans come with competitive rates. However, terms vary. For example, some offer loans based on simple interest (non-compounding interest) and no principal, with a balloon payment due at a later date.ย
Equity Home Line of Credit
A home-equity line of credit (HELOC) works much like a credit card. Youโve got access to a revolving line of credit that you can draw from as needed. Interest is due on the outstanding balance, and that rate may vary over time. Most lenders require a credit score of 680 or higher and at least 20-30% of equity in your home to qualify.
Alternatively, a home equity loan provides a one-time lump sum with fixed payments. Lenders often allow you to borrow 80-90% of your homeโs equity with repayment terms of 10 to 20 years. The longer repayment period, compared to other financing methods, makes it an attractive option for many franchisees.
Franchise Financing From Friends and Family Loans
Borrowing from friends and family can be one of the most flexible ways to get funding for a franchise. However, mixing business and family can be tricky. If there are any misunderstandings between franchise partners, it can lead to a fallout.
To keep things professional and amicable, have a franchise lawyer look over the agreement. ย Their involvement ensures everything is legally sound and in order. It will also help family and friends feel more confident and comfortable lending money when the process is more formal.
How to Finance a Franchise with No Money
What if you donโt have a retirement fund to dip into? Or friends to help you out with a loan? It can be harder to finance a franchise with little or no money, but itโs not impossible.ย
Your options depend on the initial investment. For instance, opening a major fast-food franchise like Taco Bell franchise can cost anywhere from $900,000 to $4.3 million, with a net worth requirement of $5 million and liquid assets of $2 million. Therefore, you need to be realistic about your options.ย
If these numbers sound out of reach, explore more affordable opportunities like a mobile car wash or cleaning business, which have much lower startup costs. For instance, many franchisors offer in-house car wash financing and can connect you to third-party lenders.ย
If your franchisor provides funding support, ask whether they have a financing specialist who can guide you through your options and franchise laws. If you do look at financing services, see below, here are some thoughts to bear in mind:
- Make sure your business plan is in good shape.
- Find out if they are regulated, reputable and supportive.
- Choose a lender who understands your franchise business model and long-term goals.
- Talk to other franchisees about questions to ask franchisor during the funding stage, or visit a franchise forum.
Professional Financing Services
Companies like the National Business Capital offer franchise loans to a variety of businesses nationwide, no matter their credit history. However, expect higher interest rates on these types of loans than you would on a commercial bank loan. ย Most franchisees can obtain this loan, but lenders minimize this risk by charging those rates.
Many franchisees often use professional finance services for remodeling, mandatory franchise updates, new location acquisition, and equipment purchases, repairs, and upgrades.
Due Diligence
โQuick capitalโ are two words any entrepreneur wants to hear. It is tempting to turn to alternative lenders, but speed and convenience often come at a price. Many charge much higher rates. So make sure you:
- Take time to read the small print.
- Understand the legal terms and conditions.
- Consult a financial advisor if you are unsure about the loan procedure or the small print.
When evaluating funding, itโs smart to understand your franchise value, the worth of your business model and potential return, before committing to any agreement.
Conclusion
To sum up, if youโre looking for franchise funding, itโs only natural that you want the best possible deal. If any financial solution seems too good to be true, it probably is. Take the time to do your research until youโre confident you can secure an amount that is right and affordable for you.
Before you make the final move to buy a franchise, itโs worth seeking the advice of a franchise lawyer or business advisor who will oversee the terms and conditions to ensure youโre making a sound financial decision that will help safeguard the future of your business and your bank account.
Download our business model overview to learn more about our mobile cleaning opportunity based on a proven system using steam cleaning technology.
