What Are the Best Options for Financing a Franchise?

Business.com / Funding / Last Modified: February 22, 2017

So you want to invest in a franchise—great choice! Reference this list of top franchise financing choices when you're ready to get started.

So you want to invest in a franchise—great choice! Many savvy business owners choose to go down this route. As with any business, investing in a franchise requires time, patience and hard work, but often the risks are smaller and the support network is stronger.

Franchises have tried and true business models, plenty of brand awareness and standardized practices and equipment regulations. They range from well-known international companies like McDonald’s, Subway and Supercuts, to more local chains, and employ over 8.8 million people across the United States alone.

Finally, they can give you a leg-up in the search for funding. Let’s find out how.

Related Article: Real Talk: Is Franchising As Profitable As You Think?

Look to the Mothership

The first step in financing your soon-to-be franchise is looking to “the mothership”—the franchise’s parent corporation.

You have to start by getting a sense of the capital you will need to get your business up and running, and one important cost to consider when thinking about franchises is the royalty fee.

Sometimes these are weekly or monthly cuts of sales revenue; other times, you have to stock products from designated, marked-up vendors. Either way, this is how the chain makes a profit—so be sure to take royalty fees and associated costs into account when making a financing plan.

Thankfully, parent corporations can help with financing, too. Many have in-house financing programs, are partnered with low-interest lending institutions, offer equipment buy-backs and discounted franchising fees, or sometimes even just provide useful recommendations. (Their advice often tackles issues like site selection, shop construction and layout, employee training methods and equipment standards.)

Gold’s Gym, for example, has a financing arm for location scouting and acquisition, offering incentives to investors who build smaller, cheaper “express” clubs. Meanwhile, the UPS Store helps to finance franchises in alternative locations, like hotels and college campuses. Make sure to research your options and leverage any special packages or circumstances that your franchise will help finance! 

Related Article: No Thanks, Banks: Alternatives to Small Business Loans

Apply for a Loan

While franchise parent companies can help with parts of financing, especially during the startup process, it’s likely that you might need to look into securing a loan as well. Let’s look at a few different options. 

1. Banks Loans

A bank is naturally a sensible place to go for a small business loan. Though the traditional lending industry has shrunk in the past decade, franchisees are in luck: many banks and credit unions still trust franchises, due to their customer awareness and proven track records.

In fact, according to this study presented by the Small Business Administration, 37.8 percent of new franchises are financed by commercial bank loans, as opposed to 23.1 percent of non-franchise startup businesses.

As always, before approaching a bank for a loan, ensure that your credit rating is good, that you have the necessary paperwork (a personal financial statement, tax returns, down payment fund information, and so on), and that you have taken the time to develop your business plan—even for a franchise investment.

Also, here’s a pro-tip: though commercial banks are more likely to offer financing for a franchise, they are even more likely to offer better terms for a well-reputed and successful franchise. Pick wisely!

2. Franchise-Specific Lenders

Applying for a bank loan can be a slow, long, tedious process, and many applications face rejection in this financial climate. Where else can you turn?

In the alternative lending sphere, there are a few groups that focus on or incentivize franchise financing specifically. These options may demand higher interest rates or monthly payments than banks, but in return offer speed, convenience, and often require no collateral. ApplePie Capital is one such group that exclusively finances franchises, while many others—such as Harbour Capital or United Capital—have specialized franchise arms. Their expertise in financing franchises can prove especially invaluable to first-time investors.

3. SBA Loans

Don’t forget to look into the Small Business Administration’s 7(a) Loan Program.

While the SBA doesn’t lend directly to small business owners, it does provide guarantees to banks and lenders for their loans, sometimes up to 90%. In other words, banks and lenders face a reduced risk, and are more likely to invest.

Franchises are eligible for this program so long as they follow some general guidelines, so make sure to check that your business plan aligns with their requirements. The SBA also has a Franchise Registry, and it processes loan applications for those brands especially quickly.

4. Alternative Lenders

Finally, if neither a bank nor a franchise-specific lending group meets your needs, the whole wide world of alternative lending is still left to explore. You can find longer-term loans or short-term loans online, along with equipment financing and more. Be optimistic, but cautious: too many brokers will shortchange a small business owner without a second thought.

Check for Grants and Incentives

While those are the main sources of financing a franchise, outside of digging into your own pockets and crowdfunding from friends and family, there are a few options for further finance relief.

Start by checking your state and local job-creation programs. Some offer tax credits, loans, or other incentives to start new businesses.

Also, see if you qualify for additional financial assistance through governmental programs for veterans, minorities, and women. For example, the International Franchise Association (IFA) has the VetFran program, which offers discounts on franchise fees.

Similarly, the IFA also has DiversityFran and the Women’s Franchise Committee, which are more education-based but also provide economic incentives.

With all of these options at your fingertips, choosing the path that’s right for you and your business should be much simpler. Be careful, diligent, and resourceful with your financing plan, and your franchise investment is sure to flourish.

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