If you are serious about buying a franchise, you will need funds to make that dream a reality. You may already have costs covered with personal savings or investments from family and friends. If not, you will have to secure funding from elsewhere. Buying a franchise license and starting a business can take a considerable amount of capital. According to the International Franchise Association (IFA), total start-up costs can range from $20,000 or less to over a $1 million, depending on the size and type of franchise. Short-term business loan terms are typically 1 to 5 years. However, some repayments can be spread over the entire length of the franchise agreement, which could be 20 years.
Fortunately, there is a range of ways to get financing, such as traditional bank loans, Small Business Administration (SBA) loans, business credit cards and online lenders. There are also franchisor loans, where you can secure funding through your prospective franchisor. You can easily find out if a franchise offers in-house financing simply by checking their website or looking at the Franchise Disclosure Document (FDD).
Trends show that only 32% of small business reported being able to secure funding through a traditional bank loan in the second quarter of 2019 and, therefore, had to look elsewhere for funds. If you want franchise funding, an obvious option is to go directly to the franchisor who can offer, or advise on, debt financing. Here are some reasons why this is a smart move:
Advantages of Securing Funding through a Franchisor Loan
1. Good Option for First-Time Business Owners
Franchisors want you to secure funding to buy their franchise. It helps them grow their business while helping you to fulfill your entrepreneurial ambitions as a business owner. If you’ve never owned a business before or lack the industry’s skills and experience, it can be difficult (or a very lengthy process) to get a corporate loan. Banks tend to be risk-averse when it comes to startups.
In contrast, most franchisors welcome first-time franchisees because they can provide them with training and ongoing support. This enables you to learn on the job and increases your likelihood of creating a successful business. Providing you meet their financial requirements, have creditworthiness and the passion to do well, a franchisor is more likely to be forthcoming with a loan. Depending on the in-house financing agreement, it can provide finance for:
- Franchise fees
- Royalty fees
- The lease on premises
- Working capital
Even if your franchisor doesn’t provide financing for your entire loan, they will be able to help you secure funding through a third party; franchisors tend to be well-connected in the financial sector and can introduce you to banks and other lenders who will be willing to offer you a good deal.
2. Your Franchisor Can Create a Bespoke Loan
Professional financing services can promise to get you adequate funding in as little as 24 hours but do they really know your business model like your franchisor does? If you want to secure funding, you need a well-written franchise business plan to present to a lender. The good news is that your franchisor already has a heads up on your business plan with regards to their franchise’s financial strength and stability. Inside information also includes:
- Average length of time it takes to turn a profit
- Amount of operating capital needed
- Unique selling points
- Ongoing costs
- Profit and loss forecast
- Factors giving your business an advantage over the competition
In-depth knowledge of the franchise allows the franchisor to create finance solutions that are tailored specifically to your needs. Hopefully, this means you should only borrow what you need to get your business up and running successfully. An advantage of being able to secure funding through a franchisor is that you don’t take on more debt than you need to.
3. Secure Funding with Lower Interest Rates
Research on small business trends for 2020 highlighted that interest rates were one of the top concerns for small business owners. If you go to an alternative lender to secure franchise funding, you’re more likely to pay higher interest rates than traditional lenders.
Franchisors don’t want you to pay sky-high interest rates; they would rather every spare dollar to go into your business so you can turn a profit. In light of this, most franchisor loans are offered at competitive rates. Note, every franchisor is different. For example, some offer loans based on simple interest (non-compounding interest) and no principal with a balloon payment due at a later date.
The average interest rate depends on the individual lender, your creditworthiness and the size and term of the loan. Responsible franchisors will work with you to secure funding; identifying the best possible financing solution. Bear in mind, there is no guarantee that your franchisor will offer you the best interest rate. Do your due diligence. 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.
You could also check out an SBA loan for franchise. This type of loan is backed by the US Small Business Administration – the government partially guarantees the loan, which eliminates some of the risk for whoever issues the loan. They usually offer competitive rates, typically lower than alternative or online lenders.
4. Speed up the Approval Process
“Quick capital” are two words any business owner wants to hear. However, according to business industry research, some small businesses have had to wait longer than six months to hear about a loan application. As a potential franchisee, you want to secure funding as quickly as possible so you can get to work. You don’t want to have to wait and you don’t need the anxiety of possible loan denial.
If you can secure funding through a franchisor loan, it can be a time-saving, stress-free experience. It is in the franchisor’s best interest to get your business up and running. Also, it is much easier to track your loan progress with your franchisor than to go through the official communication channels of a large corporate bank who will be processing a great many loan requests. Although you want to secure funding as fast as possible, 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 loan procedure or the small print
In the pursuit of “quick capital”, you may be tempted to turn to alternative lenders but in this instance, speed and convenience come at a price. Many charge much higher rates.
5. Help You Find Additional Funding with Other Financial Resources
Reputable franchisors will be upfront about the terms and conditions of its debt financing and other financing options available. Transparency in business, as well as good communication, are key to establishing a successful long-term relationship between franchisor and franchisee.
It is not uncommon for franchisors to offer in-house financing and recommendations to third-party sources. For example, The UPS Store, one of the top 10 franchises of 2020 clearly outlines its financing options: in-house financing to cover startup costs but it also has relationships with third-party sources that offer financing options. If you secure funding through a franchisor, it is worth asking if they have an in-house financing specialist who can offer advice and support. If you do look at outside financing, here are some thoughts to bear in mind:
- Make sure your business plan is in good shape
- If third-party financing is required, find out if they are regulated, reputable and supportive
- Does the lender understand your franchise business and your goals?
- Ask other franchisees what they did to secure funding
Above all, talk to your franchisor. They might not claim to be experts in financing but they should have good connections with approved lenders who know the franchise business model. Also, if the franchisor can only finance part of your startup costs, ask about recommended financing options, such SBA approved franchises. For example, DetailXPerts is an SBA approved franchise.
If you are looking to secure funding for your business, it is only natural that you want the best possible deal. If any financial solution seems too good to be true, it probably is. Do enough due diligence until you are satisfied that you can secure funding that is right and affordable for you.
Before you make the final move to buy a franchise, it is worth seeking the advice of a franchise lawyer or business advisor who will oversee the figures and terms and conditions to make sure you are making a sound financial decision that will help to safeguard the future of your business and your bank account.
Check out DetailXPerts’ franchise opportunity. We help prospective franchise owners select the best method to cover their franchise cost, leading them towards success as a business owner.
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