Franchise Financing: How to Finance a Franchise?

The more commitment you have to your franchise business, the better your chances of obtaining financing. Any reputable franchisor should provide guidance on how to apply for financing, especially if it’s willing to accept franchisees with little to no prior experience running a firm.

Finding franchise capital from a bank will be one of the most crucial first steps if you’re thinking about launching a franchised firm. You must demonstrate that you have what it takes to make your franchise successful in order to accomplish this.

Here we’ll define some common options for Franchise Financing:

1. Small Business Loans for Franchise (SBA

To qualify for an SBA loan, you must first have your bank loan application declined. If a bank rejects your loan application, that bank or any other bank may send it to the SBA for review. The SBA will examine the franchise you wish to purchase more closely as part of the qualification process as well as the borrower.

In light of this, the SBA7(a) loan program and the CDC/504 program are both excellent choices for franchise firms among the numerous SBA lending programs.

With an SBA 7(a) loan, you can finance practically any need, including working capital, inventory, equipment, and more. The SBA 7(a) loan program does not, however, allow for the financing of a recurring franchise or royalty fees.

You must have a strong SBA business plan, a good credit score, and (often) at least two years in operation in order to be eligible for SBA 7(a) franchise financing.

Make sure your franchise is included in the SBA Business Directory once more if you want to be eligible for an SBA 504/CDC loan for your franchise funding. The same requirements for a 7(a) loan application as well: excellent credit, strong business finances, and at least some experience in the business.

An SBA 504/CDC loan offers some of the finest rates and terms to finance a real estate or equipment need for your franchise, despite having more stringent requirements and funding delays in contrast to other options on the market.

2. Commercial Bank Loans

A standard business loan is an additional option for financing a franchise. It can take time to apply for a company loan, but since franchisees have a lower failure rate, banks are frequently more likely to issue loans for franchises. A bank loan, however, is not the best choice if you require money for your new franchise’s launch as soon as possible.

3. Friends and Family

You can finance your new franchise firm by asking family and friends for loans. While a loan from a friend or relative can usually be used for a variety of commercial needs, the risk to your personal connections is considerably larger than it is with a company loan.
Bonus Tip: Create a contract with payback terms even if the loan is informal to safeguard your private relationships.

4. Franchisor Financing

The first step should be to contact your prospective franchisor directly if you require funding for a franchise purchase. In many franchise business models, corporations offer tailored financing solutions exclusively for franchisees, either by partnering with specific lenders or providing capital directly.

5. Crowd Funding

To support everything from charities to online gaming software, nearly everyone has embraced the evolution of crowdsourcing. It may seem unusual to ask complete strangers for money for your franchise, but it’s a viable alternative if other sources of finance don’t work out.

6. Rollovers as business startups (ROBS)

An arrangement known as ROBS allows potential business owners to use their retirement money to cover startup costs. Through this process, you end up with a business that has cash on hand to function. 

7. Alternative Lenders

Consider your opportunities from alternative lenders if you need a franchise loan quickly or can’t get one through the SBA or a bank. The rates and conditions offered by these lenders may not be the greatest, but they can offer a wide range of products, less complicated applications, and liberal standards.

Let’s look at some of the best choices:

• OnDeck Capital: For franchisees who require quick access to financing, OnDeck offers short-term loans and short-term business lines of credit (for amounts ranging from $5000 to $ 250000 up to 24 months).
  Depending on your qualifications, the interest rate on an OnDeck short-term loan may change.
  OnDeck provides adaptable, accessible choices for your ongoing franchise finance needs, even while you can’t utilize their funding to buy a franchise.
• Apple Pie Capital: With Apple Pie, you may get finance for new units, refinancing, recapitalization, remodels, and acquisitions starting at $100,000. However, you can also get loans for equipment finance starting at $15,000 instead.

  The interest rates and periods you receive on your franchise loan will vary because Apple Pie works with a wide range of lenders, but as you might anticipate, they will mostly depend on the kind of product and your credentials.

• CAN Capital: You can get a short-term loan from CAN Capital in the range of $2,500 and $250,000, as well as a medium-term credit in the range of $50,000 and $150,000.
  Three to 24 months are the typical terms for short-term loans, whereas two to four years are typical for medium-term loans.
  CAN Capital levies interest on its short-term loans at a factor rate that ranges from 1.15 to 1.48.
  The interest rate for their medium-term loan may range from 12.9% APR to 29.9% APR.
• Funding Cycle: Medium-term loans from $25,000 to $500,000 are available through Funding Circle with periods ranging from six months to five years. Loans from Funding Circle have interest rates that start at 4.99% and can go as high as 22.99%.
  You must have been in business for at least two years and have a credit score of 620 or higher to be eligible for a medium-term loan from Funding Circle. There is no minimum yearly income criterion imposed by Funding Circle.
  Therefore, Funding Circle can be the finest choice for your company if you’re looking for one of the most reasonable alternative lenders and a franchise finance loan that can satisfy a variety of purposes.