Franchise Financing Options
Recently I've received a few questions from our users about what their options are when it comes to financing their franchise. So I figured it might be a good idea to put together a quick post outlining some of the options out there for financing your new franchise.
- One of the most common financing options for franchisees is by going directly to the franchises themselves. Many franchises offer financing opportunities at some level which can help to seriously alleviate some of the financial burden of opening a franchise. The actual amount of financing available from a franchise varies greatly from franchise to franchise and what exactly they are willing to help out with also varies greatly. Some franchises will defer part of the franchise fee, offer temporarily reduced royalties, or help cover the costs of necessary equipment. While the interest rates on these forms of financing can be higher than traditional bank loans they are also sometimes available without collateral requirements. The terms and conditions of these financing options vary from franchise to franchise so make sure you check with your franchise.
- Another common option is to use commercial bank loans, as if you were financing any other major purchase. Like financing from franchises themselves, the financing available from commercial banks can vary greatly based on the exact situation you are in. Oftentimes the franchise you are opening can play a big role in your ability to secure financing from a commercial bank. If you are looking to open a franchise with a more proven track record then the bank may be more likely to provide you with a loan, as they view it as a lisk risky move. The downside to this is that if you are looking to open a smaller franchise you may be required to provide additional collateral to secure the loan.
- There are also options out there to help you out if you need to use commercial bank loans. The US Small Business Administration can provide SBA loans to franchisees to help them out. SBA loans are an interesting situation because they aren't direct loans to franchisees normally. Instead these loans act as guarantees to the banks making it easier for franchisees to acquire traditional small business loans. These can be especially useful for franchisees who are looking to open smaller or lesser known franchises that banks may be wary of taking on.
These are the three primary avenues for financing your franchise. There are other options out there, but these are probably the best places to start.
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What is a Franchise?
Most of you are probably already familiar with franchises. You may even patronize a variety of franchised businesses without realising that they are franchises. These businesses range from car servicing and financial services to yogurt and home repairs. According to the International Franchise Association(IFA) franchises employed nearly 9,000,000 Americans in 2015 and generated nearly $880 billion. Franchising is difficult to escape.
What is Subfranchising?
Like the franchisor, the subfranchisor signs a subfranchising agreement with the franchisees (when a franchise is sold) in the area. Technically, the subfranchisor takes over the role of the franchisor in certain geographic regions.