When buying a franchise, the key number you will need to know for franchise financing purposes is the initial investment. The initial investment is your “all in” costs and includes the franchise fee and various startup costs such as grand opening, initial inventory, signage, leasehold improvements, supplies, equipment, and more.
Many buyers put together financing options that include a combination of personal savings, SBA loans, conventional business loan products, 401(k) rollovers, and/or franchisor in-house programs.
Getting approved for franchise financing can be difficult, particularly if you need startup funds, you have bad credit, or your franchise has been open for less than a year. However, there are a few things you can do to improve your chances of being approved for financing.
First, find out if your franchisor offers in-house franchisor financing. You should be able to find this information in the franchise disclosure document (FDD). If you want to look into other franchise financing options, research which lenders offer loans to your type of franchise. After that, you can narrow down the list of lenders based on which ones you qualify for. Be sure to check lenders’ reviews as well.
Once you’re ready to apply, most online lenders will allow you to get pre-approved quickly with a simple online application. After that, they’ll reach out to you for more information that they’ll need during the final approval and underwriting process.
Early on in the application process, it’s a good idea to start putting together the business documents lenders will ask for during the underwriting process. These include your business plan, franchise agreement, last three months of bank statements, last three years of tax returns, proof of business registration, and relevant business permits and licenses, to name a few.
Some types of franchise financing require a business loan down payment, while others do not. Generally, larger business loans, including SBA loans, bank loans, and commercial real estate loans to purchase or build a franchise do require a down payment of approximately 10% to 30%. Online lenders, which typically offer smaller loans that max out at $250-$500K, often do not require any down payment; however, they usually require a UCC blanket lien on your business assets, as well as a personal guarantee.
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Understanding Franchise FinancingOpening a franchise can be a smart choice for an aspiring entrepreneur. Becoming a franchise owner gives you the flexibility of owning a business with the added security of being part of an established brand. However, as with owning any new business, startup costs can be high, and you may require infusions of capital if you encounter hard times. Franchisees must also pay a franchise fee when opening a new franchise as well as ongoing royalty fees. You truly need a good business plan, healthy cash flow, and solid franchise financing to succeed.
We recommend and assist clients in conducting a cost-of-capital analysis as well as a general fundability or prequalification discussion with a franchise finance expert early on in the process. Based on my experience, it’s rare that we cannot find a solid funding strategy that works