If you are considering buying a franchise or are already a franchisee, you know how important it is to have access to capital. Becoming a franchise owner for a national franchise concept requires a significant investment, perhaps the largest one you will ever make. Once your franchise is up and running, you will need capital for everyday operating expenses and to keep your franchise afloat during unexpected slow periods.
Plus, it is common for franchise brands to launch remodeling/reimaging initiatives that require new signage, furniture, fixtures, and equipment. So, where can you secure funding for your franchise, and what types of funding are available? Read this Huddle Business Capital blog post to find out.
Costs of running a franchise.
Before diving deep into the various types of franchise financing and loans that are available, we want to cover some of the main costs of starting and running a franchise. The initial investment typically includes franchise fees, which are upfront payments made to the franchisor for the right to use their brand name and business model. These fees, outlined in the franchise disclosure document (FDD), will vary depending on the size of the franchise, location/buildout requirements, property improvements (if needed), and industry.
Next, franchise owners need to invest in furniture, fixtures, equipment, technology (computers, software, etc.), point-of-sale (POS) equipment, and security systems, among others. As with any business, operating a franchise will require professional services (e.g., business attorney, accountant), business insurance, and regular purchasing of inventory and supplies. Lastly, there are many ongoing expenses, such as employee payroll, rent, utilities, property taxes, and Internet access.
Franchise financing options.
When it comes to financing your franchise, several options are available, and the lender you choose will have specific borrowing requirements for the financing product you want. When comparing loan or financing terms and interest rates, it's essential to consider factors such as repayment period, prepayment penalties (if applicable), and additional fees.
A lower interest rate may seem appealing at first glance, but if it comes with unfavorable repayment terms or hidden fees, there might be better options for your franchise. Plus, working with a lender who understands the ins and outs of franchise financing can provide added benefits that are invaluable in navigating the challenges of funding your franchise.
Conventional bank loans
A conventional franchise loan from a bank requires extensive documentation and collateral and is more challenging to qualify for. Generally, it involves filling out an application form that includes personal and business information such as credit history, years in operation, and the purpose of the loan. Additionally, banks require supporting documents such as tax returns, bank statements, cash flow projections, legal paperwork, and, in many cases, a comprehensive business plan.
Nonbank loans and financing
Nonbank lenders like Huddle Business Capital offer franchise financing products with streamlined applications and more straightforward qualification requirements, not to mention faster funding turnaround times. Huddle Business Capital's lineup of funding products for single-unit and multi-unit franchisees includes franchise financing, franchise working capital loans, and business lines of credit. Franchisees nationwide look to nonbank lenders for fast, easy, and hassle-free loans and financing.
Franchisor financing
Some franchisors have established relationships with lenders or financial institutions, making it easier for them to negotiate favorable terms on behalf of their franchisees. For example, if a franchise brand launches a brand mandate or remodeling initiative, its franchisees must complete it before a specific date. By partnering with a lender that offers loans and financing, qualified franchisees can get the timely funding they need to adhere to the brand mandate or remodeling effort.
SBA loans
The Small Business Administration (SBA) offers SBA 7(a) loans and SBA CDC/504 loans for qualified franchise business owners. It is worth noting that to be eligible for an SBA loan, you must meet specific criteria. This includes having a strong credit score, a solid business plan, and the ability to provide collateral or personal guarantees. The franchise must also be under the umbrella of an approved SBA-franchised brand.
Personal savings
Some entrepreneurs choose to self-finance their franchises. This involves using personal savings or assets as capital for the franchise. While this approach helps avoid long-term debt and interest payments, it does require franchise owners to have significant personal financial resources. Plus, using up your existing savings or assets can be risky. It can leave you with a limited financial cushion and put you in a vulnerable position when faced with sudden financial challenges.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
