Learn How to Get Funding to Open a Franchise

date icon 4 minutes to read date icon 27th July, 2021

Why You Need Franchise Funding

Starting a franchise isn’t cheap. There are numerous expenses that must be covered. Consequently, it’s unlikely that you’ll be able to personally raise all of the necessary capital, and provide it to a franchisor in one lump sum.

If this is true in your case, you’ll need to secure financing from another source – find out precisely how to get funding to open a franchise below.

Obtaining Financing – the Basics

What You’ll Have to Pay for

How much does it cost to buy a franchise? On average, approximately £40,000. This figure encompasses the initial franchise fee, startup costs, and working capital.

The initial franchise fee is the payment you must make in order to secure a license to use the franchisor’s intellectual property. It’ll also see you receive training, and expert assistance with regards to site selection, recruitment, and so on. Generally, this will only be roughly 10% of the total investment, although in certain circumstances it’ll be much higher. On the other hand, the startup costs you must pay will be based on the price of equipment, store fit-out, supplies, and more. While working capital refers to the money you’ll need to cover any expenses incurred during the first months after your franchise launches.

A significant proportion of the above costs can be covered by a loan or another kind of funding. However, it’s important to realise that a franchisor will only accept you as a franchisee if you can provide a certain amount of capital yourself.

Want to know what else is involved? See our definitive guide to the things you must consider before buying a franchise.

Who Can Help You?

The vast majority of first-time prospective franchisees have limited experience, and often don’t know how to get funding to start a franchise. But you won’t have this issue. Let us talk you through the four most widely-used sources of franchise funding…

Franchisors

There’s no one who’ll understand your need for franchise funding more than the franchisor you plan to partner with. They’ll know the risks you’ll face, the chances of you succeeding, and the profits you’re likely to earn. In an ideal scenario, the franchisor will be able to offer you direct funding. If they can, they’ll likely structure the loan in such a way that your life as a franchisee is made much easier. For instance, you wouldn’t have to start paying any of the money back until at least one year has passed following the initial launch of your franchise. But bear in mind, franchisor financing is quite rare.

Commercial Banks

A commercial bank will be able to help you fulfil the investment requirements. Most franchisees are able to secure capital that covers up to 70%. However, as part of the loan application process, you’ll have to present a detailed business plan. Furthermore, your credit history and current income level will both be reviewed – these will impact the interest rate and terms of your loan. Rest assured that this is standard for all franchise business loans. The lender you speak to will look through all the documents you provide and make a decision within a few working days. Their aim will be to determine whether you can be expected to pay them their money back.

Friends & Family

While trying to find out how to get funding to open a franchise, many franchisees overlook the obvious – their friends and family. If you’re able to ask your relatives or close friends to provide you with a loan, you’ll be able to expect favourable terms. However, you should still make sure that an official contract is drawn up and that both sides are completely satisfied with it. In addition, you must give your friend or relative a clear idea of when you’ll be able to repay them.

Alternative Loan Sources

Another way you can secure franchise funding is to request an SBA loan. These have many similarities with standard commercial loans but are partly covered by the United States Governments’ Small Business Administration. As a result of this, the risk to lenders is reduced and they’re able to offer better terms to prospective franchisees. The only downside is the complexity of the application process.

Based outside the US? There are similar schemes in most countries. For example, in the United Kingdom, you can ask for a government-backed startup loan.

Your Business Plan

Funding a franchise will almost certainly require the creation of a business plan. This documentation will cover a variety of topics related to your proposed franchise business. Firstly, it’ll need an executive summary – a short description of the franchise opportunity you plan to take, and how you’ll make the most of it. Moreover, you’ll need to provide a number of personal details such as your age and marital status, as well as your level of experience, qualifications, and skills. Following this, you’ll have to give an overview of your future franchise in terms of the customers you’ll target, the type of market you’ll be entering, and the competitors you’ll be coming up against.

After you’ve completed these steps, you must move on to the intricate details. This will require you to answer questions such as: where will your outlet be based? What stock will you need? How much equipment must you purchase? And are there any vehicles that you’ll need to buy? On top of this, you must describe your management structure and marketing strategy, as well as provide a financial projection.

Act Now

After you’ve read this guide, you’ll be aware of how to get financing for a franchise business. Therefore, you’ll be prepared to research franchise opportunities and choose the one that suits you best. This being said, if you’d still like further assistance, you can contact Franchise Fame directly.