Franchise Financing: Is It Right for You?

Franchise financing – it’s not rocket science, but it is the key to launching your franchise rocket! Ready to demystify the dollars and make your franchise dreams take flight? We’ve got your back.

Franchise Financing Lenders:  Five Questions to Ask Before Committing

However, there are several factors to consider before deciding whether or not to get involved with franchising. Here are 5 questions you should ask yourself before signing on the dotted line.

1) What type of business do I have? If your business does not lend itself well to being part of a larger organization, it may be better suited as a stand-alone operation. Franchises tend to focus more heavily on marketing and branding than most other types of companies. They’re often very good at selling products and services, but they don’t necessarily offer much customer service. So if you already know what kind of company you’d like to run, this might be a good time to think about starting up on your own.

2) How many employees will my business need? Many people working under one roof can make things complicated when managing payroll taxes and benefits. And while franchises typically provide some employee training programs, they won’t always cover everything you’ll need to know to operate your own business effectively. You could end up spending thousands of dollars just getting started. On top of that, you’ll probably find that hiring someone else means paying them less than you would pay yourself. This makes sense financially because you’ll only be responsible for providing them with a salary. But it doesn’t leave much room for profit margins. In addition, you’ll likely lose out on any potential savings by giving away so much control over how your business operates.

3) Do I have enough capital available? Most franchises require a minimum investment amount ranging anywhere between $10,000-$100,000 depending on the size of the territory you plan to serve. That said, even though these numbers seem high, they aren’t really all that difficult to come by. Many banks now offer loans specifically designed for entrepreneurs looking to open their own franchises. These programs usually allow you to borrow based on projected sales figures rather than actual cash flow. As long as you keep those projections realistic, you shouldn’t have too much trouble finding funding.

4) Will I enjoy running my own business? No question is owning a successful franchise takes hard work and dedication. But if you’ve got the right personality traits, you might actually look forward to meeting new challenges every day. However, the truth is that most people wouldn’t choose to spend their days doing something they didn’t love simply because it was profitable. It’s important to remember that there’s nothing wrong with making money; it’s just that sometimes we forget why we wanted to start our businesses in the first place.

5) Is this the best use of my resources? When you decide to become an entrepreneur, you’re essentially putting your life into motion. While it’s true that you’ll still have plenty of free time once you close down shop each night, you also give up certain opportunities that others take for granted. For example, you may not get paid vacation or sick days. Or maybe you won’t receive health insurance through your employer. If you want to ensure that you’re able to afford retirement later in life, then you should consider opening up your own small business instead of taking another job at a larger corporation.

Bonus Question!

6) What are my goals? Before you jump headfirst into becoming an entrepreneur, it helps to ask yourself exactly where you see yourself going after you retire. Are you planning to travel around the world? Open up your very own restaurant? Start your own non-profit organization?

Whatever your dream career turns out to be, make sure that it aligns well with what you hope to accomplish during your lifetime. Otherwise, you risk wasting years of your life working toward something that isn’t worth pursuing.

How To Get Franchise Financing?

A franchise loan is a type of business financing that allows you to buy the right to use another person’s trademark, logo, or other intellectual property. The franchisee pays an up-front fee and agrees to pay royalties on sales generated by the franchisor. This can be a great way for small businesses to get started without investing in their own brand name.

Business loans are available from banks as well as private lenders who specialize in this kind of lending. You should always seek advice before taking out any form of debt. If your credit score isn’t good enough to qualify for traditional bank loans, then it may not be high enough to secure a franchise loan either.

A medium-term loan is one where you borrow money over a period of time ranging between 12 months and five years. It’s usually used when there is no need for immediate cash flow but rather long-term growth plans. A short-term loan is typically anything less than three months. These types of short-term loans are often referred to as “payday” loans because they’re meant to help people cover unexpected expenses until payday arrives.

The Small Business Administration backs an SBA-backed loan or conventional loan. They offer low-interest rates and flexible repayment terms. However, this online loan option requires collateral such as real estate or equipment. In addition, borrowers must have at least $5 million in annual revenue and a net worth of $1 million.

How To Get Funding For A Franchise?

Equipment financing is also known as working capital finance. Equipment leasing companies provide financial assistance to small businesses looking to purchase new equipment. Leasing companies will lease the equipment back to the company with payments based on how much usage occurs during each month.

Franchise financing options include:

• Franchise Loans – these are secured loans provided through a third-party lender which allow the borrower to acquire ownership rights to a specific franchise system. Borrowers generally make monthly payments to repay the principal amount plus interest. Some franchises require additional fees upfront; others charge ongoing royalty payments.
• Equity Finance – equity finance refers to unsecured loans made directly to the franchise owner. Typically, the initial investment required is higher than what would be needed if borrowing against assets. As part of the agreement, the investor receives a share of future profits.
• Private Label Loan/Leaseback – a private label loan is similar to an equity finance arrangement except that the funds come from a source outside the franchise operation itself. For example, a manufacturer might lend money to a retailer to open his first store using its products.

Alternative Financing Programs to Consider – How to Save Money in the Long Run

Alternative financing programs exist for those who don’t meet the requirements for standard business funding sources. The most common alternative financing program includes a line of credit.

Many different institutions offer a line of credits, including commercial banks, credit unions, and other nonbank entities. Lines of credit are designed to give customers access to a certain dollar limit within a specified timeframe.

Once the account reaches the maximum balance, the customer has 30 days to pay off the entire outstanding balance.

Financing for franchising can take several forms depending upon your needs. If you want to start a new location quickly, it may not matter whether you use traditional bank lending or alternative financing methods.

But if you plan to grow slowly over time, you should consider all available alternatives before making any final decisions about where to get your startup capital.

Paying Franchise Fees

The franchise fee is usually paid when signing the contract. It covers legal costs associated with opening a restaurant. This cost varies widely between states but typically ranges from $10,000-$20,000.

In some cases, the franchisee pays nothing until after they begin operating their own restaurant. Other times, the franchisee only pays a portion of the total franchise fee. Depending on the state, there may be tax benefits involved. Check with your accountant to see if you qualify for any deductions.

A solid business plan with a track record will help ensure success in this industry. You need to have a clear idea of what type of food you intend to serve, as well as what kind of atmosphere you hope to create at your establishment.

Your menu must reflect your target market. Do you offer healthy foods? Or do you cater more toward families with children? Will you provide entertainment such as live music or karaoke? Are you planning to sell alcohol?

Loan Application Process

The loan application process varies depending on which online lender you choose. Some will ask questions about how much money you want to borrow, what assets you plan to pledge as security, whether you’ve had previous bad debts, etc.

Others will take information off your resume and send you a prequalification letter with details regarding the amount of funding you’ll receive based on your financial situation.

Most lenders will allow you to complete the entire loan selection process using only a computer if you decide to apply online. Loan origination fees for these small-business loans range anywhere from 0% to 5%. Most companies charge around 2%, although some charge more if you don’t meet certain criteria.

You might also consider applying for a line of credit instead of borrowing against your home equity. Line of credit comes with lower monthly payments and better terms than mortgages. But keep in mind that lines of credit aren’t insured by the federal government like mortgage insurance is. So if something happens to your house, you could lose everything.

The loan options selection process for online franchise loans is similar to those offered through brick-and-mortar locations. Lenders use data provided by third parties to determine eligibility. Once approved, you’ll receive a formal contract detailing all the terms and conditions of the agreement.

When shopping for a business loan, make sure you understand exactly what types of financing you’re getting. For example, many commercial loans include prepayment penalties.

That means if you repay early, you’ll owe additional funds.  Business owners should always pay close attention to any fine print before signing an agreement.

How Much Money Do I Need?

You’ll first need to figure out how much capital you can afford to invest in your new venture to get started. The franchise owner’s initial investment ranges between $50,000-$100,000.

This includes purchasing inventory, furniture, fixtures, software licenses, marketing materials, training programs, advertising costs, legal fees, and other startup expenses.

The average cost per store is approximately $150,000.

Once you know how much money you can spend, it’s time to calculate your break-even point. Your goal here is to find the number of stores needed to reach profitability within one year. 

Franchise business owners typically start their businesses with two to five units. If you are planning to open multiple franchises, then you may be able to increase this number.

However, there’s no guarantee that you’ll hit your target numbers right away. It takes several years to build up enough cash flow to cover operating expenses.

What Are My Options?  How to Choose a Franchise That Fits Your Needs

There are three main types of franchising: single-unit, multi-unit, and chain. 

The first-time franchise owner usually chooses a single-store model to test drive the concept without much upfront capital.

Multiunit models offer greater flexibility since each location has its own unique set of requirements. Chain operations require significant amounts of capital but have proven success rates over long periods.

Single Unit Franchises

A single-unit franchise allows you to operate just one restaurant or retail outlet under the brand name.

You must purchase at least 51 percent ownership interest in the company. 

Prospective franchisees will also need to complete extensive background checks and submit financial statements showing past income and assets.  

Assistance to franchisees who plan to buy existing restaurants is available from both private equity firms and banks.

Private equity groups provide funding based on the value of the underlying asset.

Banks often lend more than 50% of the appraised property value. In addition, these lenders charge higher interest rates compared to traditional bank lending.

Multi-Unit Franchises

If you plan to expand beyond one location, consider opening more than one franchise under the same brand name.

In most cases, these outlets share common management teams and systems. They often sell products from the same suppliers and serve customers using the same menu items.

These chains tend to generate higher profits due to economies of scale.

Potential franchisees should expect to pay anywhere from 10%-20% of the total sales for an individual franchise site.

Some companies allow franchisees to lease space instead of buying land outright.

Leasing options include rent-free leases, where the landlord covers all construction costs, and fully leased facilities, which means the tenant pays 100% of the building costs.

Chain Operations

The final option is to become part of a larger organization known as a “chain.” Chains consist of many different locations spread across various regions.

Each store operates independently yet shares similar branding standards and operational procedures. This type of operation can help new entrepreneurs gain experience before branching out into other markets.

Franchise finance options vary depending on whether you’re starting with a single unit or expanding into multiple units.

If you choose to start small, it may be easier to secure financing through a local lender.

However, if you decide to go big, you might find better deals by working directly with a national group like our Business Line of Credit Group.

We specialize in helping franchise owners get started and grow their businesses. To learn more about how we work together, sign up with our online application today!

Conclusion

A franchise finance specialist can assist you in determining your best course of action when considering franchising.

Contact us today to speak with someone who can answer any questions that you may have regarding the best franchise finance solution.

FAQs for Franchise Financing