One of the smartest ways to establish a business is to become a franchisee. With a real entrepreneurial spirit and good capital, a business owner can make a franchise successful. The franchisor (the parent company) gives the right to use its brand name, business name, and products. A franchise contract may last for two decades. However, there is a way to renew the agreement.
Franchise start-ups may cost thousands to millions of dollars. Thus, financing is the best option for starting a franchise business.
Franchise financing refers to the way of funding the franchise business. Financing opportunities are available to:
- Buy a franchise
- Finance the required real estate
- Renovate storefront
- Purchase inventory
- Buy other essential assets, including equipment
How to calculate the franchise opening costs
The cost of starting a franchise is not different from the cost of setting up other businesses. However, franchise owners have to pay some special fees to get marketing solutions, operating guidelines, and training from the franchisor.
These costs include-
- Franchise charge– Several companies charge a fee to establish a franchise, and there may be an option of paying the amount in installments. This amount is not refundable, and it may be different for every company.
- Advertising and royalty fees– Some franchisors have imposed recurring royalty fees and marketing charges. The amount may be a part of the overall sales of the franchisee. In most cases, the disclosure document mentions the details about franchise fees. Moreover, the disclosure provides information related to the franchisee’s obligations, financing options, and financial performance of the franchisor.
The most popular franchisee financing options
- Franchisor Franchise Loan
There are franchisors offering good financing options. They generally provide financial details on their websites. A franchisor needs to provide the federally mandated FDD (Franchise Disclosure Document) at least 2 weeks before selling the franchise. The document reveals the franchise loan details.
Thus, franchisors can be the best financing source for the franchisee. Still, franchisees with strong credits can look for cheaper funding options.
- Bank loan–
A bank offers funding opportunities to potential franchise owners. Although some financial institutions avoid lending funds to a new business, they can provide franchising business. Moreover, some banks offer franchise loans to those who have a high credit score and a solid business model.
The franchise business owner needs to submit several documents to secure bank loans. Furthermore, the bank will like to see the business model and evaluate the business credit. Some financial institutions are highly conservative, and without a good record, it is not easy to get a loan.
Banks are also the franchisee to choose collateral. When he has no business assets, he has to prefer home equity. He may need to pay almost 20% of the upfront costs to get the loan.
Banks offer multiple loan options like term loans and lines of credit. Term loans are best for a particular project, whereas lines of credit are perfect for cash flow needs.
- Retirement Funds
With a 401(k) retirement account, a franchisee can borrow an amount for funding a business. He can purchase a franchise with a Rollover for Businesses Startups. ROBS plans are popular for franchise financing. ROBS is not technically a loan and does not cause the business owner to incur debt. Many notable franchises encourage their franchisees to consider ROBS for funding.
- Equipment financing-
Equipment financing is essential for franchise buyers. There are several funding options for investing in equipment. In the case of equipment financing, the equipment will be the collateral, and the business will receive cash for the equipment.
- Small Business Credit Card
It is another financing option for a low-cost franchise, and the funds will directly go to the corporate bank account of the applicant. However, this option also has some risks. Although many cards have a low introductory rate, this will expire after a period of time, forcing the business owners to pay a much higher interest rate.
In most cases, business credit cards are useful for financing day-to-day costs and other major purchases. Credit cards can be the right choice for short-term financing that ensures smooth cash flow.
- SBA Loan
Small business Administration guarantees loans at a reasonable rate. But, the SBA works with other financial institutions to provide the funding, while the SBA provides a guarantee if the borrower defaults for any reason. The SBA also sets rules for lenders to get its guarantee.
One major problem with the SBA loan is that the application process is complicated. The applicant must have strong credit to obtain the loan. There is no need to choose any collateral to be eligible for the loan.
SBA offers loans of different types. For example, the SBA 7(a) loan is highly popular for financing franchises. The loan program can fund up to $5 million, and the repayment period is 10 years. For equipment financing, the repayment period can be up to 25 years.
How to be eligible for franchisee financing
Based on the chosen type of financing, there are different eligibility criteria. Proper documentation, can make the loan application process much easier. The lender may also ask for some information about the franchise to be purchased.
In some cases, there are opportunities to purchase a franchise without upfront payment. However, the franchise owner must have solid qualifications and good credit for this purpose. The reality is that without a down payment and solid financing options, it may not be easy to purchase the best franchise.