To develop, maintain and continue growing a franchise operation requires skill, time and money. From consultation costs, marketing and advertising fees, operational equipment, products, staffing and payroll, utilities and more – one thing is certain. And that is that the world of franchising requires some form of capital in order to get going. If, after determining that franchising is for you, one of the more pressing questions on your mind is how to get financing for a franchise, we offer five of the most common funding sources for franchise business development. Keep reading to find out more.
How to get funding for a franchise
Although not an exhaustive list, our top five picks for franchise funding are outlined below.
- Asset-backed loans: some franchise businesses operate using a lot of physical assets. These are tangible goods that have a financial value attached to them. If you are facing some cash flow problems, it may be possible for you to consider taking out an asset-backed loan. What this loan type does is evaluate the asset(s) you may own and based on their value, offer you a loan. Such a loan is usually between 60% and 90% of the asset’s value. These types of loans are great if you’re short on cash and need to manage payroll quickly or if you’re expanding your business and in the process of scaling. You choose this as an alternative to traditional bank loans.
- Private loans: a private franchise loan is a loan that is offered to franchise operations by private lenders. These lenders can be banks, building societies or other financial institutions. In order to apply for such a loan, you would need to make a strong case for why you are in need of the loan and also what guarantees you have that you will be able to repay it. Factors to consider here are your credit score, history and rating, interest rates, loan repayment periods and more.
- Partners and investors: another way to acquire finance for franchises is to approach non-institutional investors who have the funds and are willing to invest them in ventures that they believe will have the potential to succeed. In most cases, these investors will be looking for equity in your business, meaning some percentage of ownership as well as a profit-share scheme. On the other hand, there are individual investors who you can partner with and operate as a silent partner, they simply offer you the funds you need to get your franchise going, while remaining in the background. One catch is that they will also be considered an owner (depending on the legal arrangement you choose beforehand) and will also require a profit-sharing agreement to be signed in order for them to make back the money they invested in your business.
- Friends and family: franchise finance does not only have to be acquired through formal routes. Informal ones work just as well. Here, you can rely on friends and family to help you achieve your business goals. This is usually done by pooling together resources such as savings and having your loved ones offer these to you under certain conditions. In the best case scenario, if you opt for getting franchise funding from friends and family, it’s best to capture the details and stipulations of your agreement on paper so that both sides feel that the conditions are clear and that each party has their own corresponding rights and obligations.
- Franchisor funding: perhaps the most crucial aspect when it comes to how to fund a franchise is franchisor funding. By their very nature, franchises are established brands with a history in the local and possibly international market. They have years of experience and have weathered many storms. What’s more is that they’ve successfully built a business model that has proven to be profitable. One thing that many people interested in franchising may not take into account is the fact that franchisors, as established and profitable brands, have created relationships with lenders and other financial providers which can be used to your advantage. Not only will such relationships help you secure franchise funding for your business and your development goals, but you’ll also be able to prove that based on the franchisor’s business model, you’re more likely to succeed than a startup. Finally, you may also have the possibility of speaking to your franchisor about entering into an agreement with them regarding financing your franchise. It will all depend on every unique situation and circumstances but this option may be on the table for you, too.
There are several options you have at your disposal when it comes to how to get money for a franchise business. You can always start off with an asset-backed loan or a loan from a private financial institution. Partners and investors are another option to consider, but this will mainly depend on the level of research you put in and the network of individuals you have in your circle. Then, of course, you can always appeal to friends and family to fund your franchise venture, although as a cautionary note, we advise that any agreement you enter in such a case is put down in writing. Finally, and possibly the best option you have is to consider franchisor funding. This offers a world of opportunities for you and can provide you with a seamless transition as you build and develop your franchise business.