Owning a franchise gives you the support and infrastructure of a big corporation with the independence and flexibility of being your own boss. Affording a franchise’s startup costs is not easy, and most entrepreneurs will finance the first couple of locations they open. You can use several franchise financing options, such as bank loans, crowdfunding and Small Business Administration loan programs.
One of the most popular financing options for franchises is borrowing from the franchisor. Because you are getting a loan from someone who knows the ins and outs of your franchise, you can find all you need for equipment, location and fees from one source. It is essential to review the terms of loans and franchise contracts with an attorney to be sure you know when and how you will be repaying the funds.
Commercial Bank Loans
A commercial bank loan is what most people think of when they consider business financing. These are term loans, such as a mortgage or student loans, tailored for commercial entities, meaning they look at your credit and business credit history. For instance, if you are taking out a bank loan on a second franchise location, then your first location’s credit history will be considered.
The U.S. Small Business Administration has loan programs that partially back commercial loans, reducing the risk to lenders, and making it easier to offer franchise financing. SBA loans have lower interest rates, larger sums and longer repayment terms than other options. Considering the lengthy application stage for these loans and the spending restrictions for different programs is crucial.
Alternative lenders have less stringent requirements and shorter turnarounds than traditional options. They feature higher interest rates, shorter repayment terms and lower cash amounts, but have a quick turnaround. These types of loans include equipment financing, term loans and business lines of credit.
Crowdfunding may seem like an odd choice for a franchise, but not when you consider that there are crowdfunding sites for specific industries and business types like franchises. It is also important to remember that not all franchises are in the service industry.
Friends and Family Loans
Borrowing money from friends and family can be tricky and may cost you valuable relationships. This danger is why it is essential to write a contract with repayment terms and expectations before borrowing money, asking for a gift or bringing on a business partner.
Franchise financing can be found from various sources, making it easier to afford the freedom you want by being the boss. You can even find funding through the franchisor, helping you get everything you need in one stop.