Financing a franchise in 2022 after a global pandemic and with soaring inflation is a major concern to most franchise buyers. These uncertain economic times makes it even more difficult for a potential franchise owner to raise funds for a franchise investment. But potential franchise owners who are short on capital shouldn’t get discouraged. With the right strategy and intelligent decision-making, you can find the right avenues to turn the dream of franchise ownership into reality.
What is franchise funding?
Franchise funding comes in the form of small and large-scale franchise loans and grants guaranteed by entities such as the federal government, the franchisor, and third-party lenders. These entities can provide the capital that you need to start your franchise.
What is it Like Getting Funding for Your Franchise in 2022?
According to the most recent Startup Sentiment Index of April 21-28, 2022, 28% of respondents believed business conditions would be better in the coming quarter. The percentage of entrepreneurs concerned about finding adequate funding was down to 68.7%, with those seeing funding “harder or much harder” to obtain in the next three months at 37%.
Best Funding Options Available for Franchise Owners
As per IFA, the average initial franchise opportunity costs around $250,000 in the US, excluding real estate.
Also, the franchise fees range from 10K to $50,000, and royalty fees paid by franchisees range from 3% to 6% of monthly gross sales. Fortunately, with innovation and unique concepts, there are low-cost franchises to start offering you high profitability and the chance to be your boss.
Potential franchise buyers who cannot cover these costs themselves require funding in a franchise investment to cover expenses and fees associated with franchising. There are multiple financing options available to franchisees. Franchisees may opt for one or more franchise funding source depending on the fiscal deficit they need to make up. Financing options to consider include
Franchisor Financing
In some cases franchisors may offer direct financing support to their franchisees. More commonly they partner with a curated list of third-party lenders to provide support to their franchisees. Financial support programs typically cover financing for franchise fees, equipment purchases, property leases, and other business aspects.
During the pandemic many franchisors educated franchisees about applying for PPP funds, the Employee Retention Tax Credit, or the Restaurant Relief Fund, indirectly helping franchise owners with franchise funding.
Commercial Bank Loans
Financing your franchise through a commercial bank loan is the most common way to fund your franchise investment. After reviewing your business plan, net worth, and credit history, commercial banks may offer a loan for start-up costs. The franchisee is then required to pay back the loan with interest in installments over a particular period.
Stronger financial histories and higher credit scores guarantee access to better terms and interest rates in bank loans.
Small Business Association (SBA) Loans
SBA loans are federal government-secured loans that franchisees can gain access to if they meet the requirements to get one. These loans offer lower interest rates and longer repayment terms than commercial bank loans. According to Franchise 500, Type 7(a) loans are more favorable for new franchisees than type 504 loans, which have more limitations.
Generally, SBA follows a similar review process to commercial bank loans. Still, the loan amounts approved for the franchisee under an approved lender will be higher than for a commercial bank loan.
This option is a highly desirable one for funding your franchise.
Alternative Lenders
If your application is turned down for a commercial bank or SBA loan, alternative lenders may come to the rescue. These lenders offer less stringent and faster review processes, but the downsides are higher interest rates and shorter repayment times. Franchise owners can also obtain these loan types for specific purposes such as equipment financing,lease costs, and operating costs.
Personal Assets
Personal assets, including 401k plans, severance packages from previous employers, home equity, and saving accounts can be excellent franchise funding sources. Obviously, the risk to this franchise financing is your assets are on the line. If you are considering a personal asset investment, such as using your retirement savings plan, consult with a financial professional before you do.
Rollovers as Business Startup (ROBS)
Rollover for Business Startups (ROBS) is similar to personal asset investment. It involves withdrawing funds from a retirement savings plan like a 401(k) to finance your new franchise. It eliminates the need to incur new debts and allows franchisees to leverage their qualified retirement funds to finance their businesses.
ROBS strategies allow business owners to use any portion of their retirement funds and diversify their portfolios with an active franchise investment. ROBS plans incur zero debt and are tax-deferred. The processes of this financing model are guided by the Internal Revenue Service (IRS) and the Department of Labour (DoL). The Security Act of 1974 governs the process. Due to its complex rules, franchisees are advised to work with experienced funding providers
Securities Backed Line of Credit (SBLOC)
If you have invested in securities, you can raise franchise funds through the Securities Backed Line of Credit (SBLOC) lending option. This instrument can help you realize the value of a portfolio investment without selling the securities. An SBLOC collateralizes a revolving credit line by their security’s value in a brokerage account. They are attractive because the application process is easy and the approval process is fast. The loan interest rates are also lower than other common forms of credit with no term or maturity date.
Equipment Leasing Plans
Equipment leasing plans are when you rent or lease equipment at a nominal investment instead of buying them outrightly. A franchisee implements the expression of interest, and the franchisor who already has agreements with leasing companies, makes the equipment available. Generally, equipment makes up between 25 and 75% of the total start-up costs of a franchise. Hence, equipment leasing can be of great help to franchisees.
Funding Options for Franchise Buyers with No Money
Crowdfunding
If you have no prior wealth and cannot raise funds through loans, there is a way to start a franchise with no money. Crowdfunding provides an avenue for entrepreneurs to raise funds via online forums.
Friends and Family
Franchisees with poor credit ratings or who cannot afford to pay interest find taking loans from friends and family more accessible options. However, this funding type’s risk can negatively affect personal family relationships. These loans can cause disagreements if professionals do not draft the contract terms adequately.
Knowing the franchise funding options available to own a franchise is not enough. Understanding the eligibility criteria and other norms can accelerate your journey towards entrepreneurial goals. Use the following steps to prepare yourself for franchise funding:
Guidelines to Franchise Financing
Read Franchise Disclosure Document
You can find whether your franchisor offers in-house financing or has an approved list of lenders through the Franchise Disclosure Document. The FDD is an important document that gives you a precise statement of all the support and promises a franchisor makes to its franchisees.
Verify SBA eligibility
You need to know if a franchise opportunity is listed in the SBA Franchise Directory. Investing in franchise brands listed in the franchise directory assures more lending opportunities to franchise owners.
Determine Your Collateral Value
Before seeking franchise funding you should determine your collateral strength. Lenders require franchisees to guarantee their loans with assets like real estate properties, cash, and stocks. The higher the value of your collateral, the higher the chances of getting approval.
Check Your Credit History
You should know your credit score and credent history before approaching a lender. If your score is less than ideal start to take steps to improve it before approaching a lender.
Create a Business Plan
All lenders require a business plan before lending you liquid capital. The business plan is a document that can spell the difference between a successful or failed loan application. A business plan should provide a technical business study, cost analysis, projections, working capital, and information on the net worth and credit references. Although alternative lenders require less comprehensive business plan documents, banks need a more detailed business plan with estimated revenue and operating costs.
Apply with Multiple Lenders
Franchisees have a better chance at getting their required business capital when they apply to multiple lenders. Another benefit of this is that it allows you to compare loan rates and terms and choose the best option.
Choosing an Appropriate Funding Strategy
Getting finance to become a franchise owner will largely depend on whether you are:
- A first-time franchise owner.
- An existing multi-unit franchise owner.
- A military veteran.
The best mix of Franchise funding strategies for each category of franchisees is discussed below:
First-Time Franchisee Owners
First-time franchisee owners should contact a credit bureau for information on their credit score. You can verify your eligibility for corporate, bank, or SBA loans with this information. After optimizing your credit score, you can proceed to make applications to multiple lenders.
Multi-Unit Operators
Multi-unit operators often require financing to open new franchise units.
The strategy for multi-unit operators will be to document the financial details of their operating franchise stores and present them as a basis for investment.
Successful business owners can make applications to multiple lenders with satisfactory proof of profitability.
Multi-unit operators also have the advantage of blitzscaling profits from existing franchise units into their new franchises allowing them to bolster their available capital.
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The smart strategy is to shield the larger portion of investment with financing options.
Military Veterans
Military veterans tend to excel as franchisees because they can follow the system properly. Military veterans franchise owners are often disciplined and successful business people, and many franchise concepts offer discounts to veterans. Check out Fransmart-backed franchises for military veterans discounts and seven financing options for military veterans.
Other Franchisors Support Services Along with Financing
Financial aid from franchisors also comes with other business support services, including insurance, warehousing, and inventory management that support trade and the seamless operation of a franchise unit. The franchisee should ascertain the availability of additional support services in advance.
Business Insurance
The franchise agreement should clarify insurance policy coverage specifications.
Payment Processing Services
Franchisees now have a centralized payment system integrated directly by the franchisors levied by the flat rate fees.
Conclusion
Buying a franchise opportunity is a financial commitment. Once the franchise finance is procured, potential franchise buyers’ dreams become half reality. It’s then up to the franchisee to ensure the smooth running of their businesses until it becomes profitable. Franchise funding provides the working capital needed to effectively run the franchise while meeting all the franchise agreement requirements.
Fransmart, the leading franchise development company for emerging brands can help franchisees with all aspects of franchising, including funding. According to a recent study, up to 94% of franchise businesses fail during the first year of operation. The primary reason for this is the lack of adequate funding when the franchise begins the process. Fransmart helps you choose the right franchise funding option and the most profitable franchise opportunity of 2022.
FAQs
Is it possible to buy a franchise with little or no money?
Seek franchisor funding, and if your franchisor doesn’t provide financing, turn to other funding sources like crowdfunding or funding from relatives.
Do banks give loans to franchises?
Yes. Banks provide loans to franchisees if the franchisee’s credentials meet the requirements for a loan.
How much can a franchisee borrow?
If a franchise brand is accredited, banks and other lending institutions may provide up to 70% of the needed amount for a franchise investment.