In some ways, purchasing a franchise may be seen as a shortcut to business ownership. Franchisees get many of the same benefits and incentives as traditional entrepreneurs but also have the opportunity to work within an established business model. With the franchise’s product, brand equity, and infrastructure all in place for you, it becomes that much easier for you as the franchisee to get up and running so that your business can start making you money.
The challenge, of course, is that this infrastructure comes at a price. The fee to get started as a new franchisee can range from the tens to hundreds of thousands of dollars—not an amount the average aspiring business owner has just lying around. When you add in advertising costs and ongoing royalties, it’s enough to leave one unsure of how to even get started.
If access to funds is standing in the way of your franchising dream, look into these four great franchise financing options that can help you reach the path to success.
Franchisor Financing Programs
Before looking to third parties to finance your franchise purchase, always start with the franchisor itself. Remember, even if this is your first franchise purchase, the franchisor has done this before many times!
The UPS Store, Gold’s Gym, and several over major brands offer their own proprietary financing options, either funded by the business itself or in partnership with a lender. In fact, this is one of the most common ways to fund a new franchise!
Even if yours doesn’t have such an arrangement, they may at least be able to connect you with a lender who has approved applications from their franchisees in the past. The more information or opportunities you can gain directly from your franchisor, the less you’ll have to reinvent the wheel in financing your franchise.
Commercial Bank Loans
Beyond going directly to your franchisor for financing, a traditional term loan from a commercial bank is likely the first choice you had in mind to fund your franchise. With this option, you would borrow a lump sum of capital for your franchise startup costs, then pay back the loan, plus interest, on a set payment schedule.
Traditional bank loans are a great option for franchisees because of their low interest rates compared with other borrowing options. However, you’ll need a stellar credit rating as well as a strong business track record in order to qualify. Commercial banks are notoriously risk-averse in the small-business lending space, so first-time franchisees—even those with excellent credit—may struggle to obtain franchise financing through this avenue.
The U.S. Small Business Administration (SBA) doesn’t directly lend money to entrepreneurs, but the SBA does have several loan programs for aspiring business owners—including franchisees. Essentially, the SBA’s programs serve to guarantee all or a portion of loans for an intermediary lender, removing some of the lender’s risk and making them more open to working with small business owners. Through the SBA’s programs—the 7(a) and CDC/504 programs in particular—franchisees may be able to qualify for low-interest commercial bank or alternative loans that may not otherwise be accessible.
Unlike working directly with a commercial bank, applying for franchise financing through the SBA is a more favorable option for first-time franchisees, as the SBA’s programs are geared specifically for this demographic. And because SBA loans come with regulated maximums, your interest rate is controlled proportionally to the prime rate capped by the federal government.
For most borrowers, the biggest downside to applying for an SBA loan is timing. Because applications processed through the SBA require approval from both the government agency and the lender, borrowers typically find themselves waiting several months to get cash in hand.
Online Alternative Lenders
From short-term loans to cover seasonal cash-flow slumps, to equipment loans and even long-term loans for the full cost of a new franchise, the loan options available to franchisees through online alternative lenders can cover virtually every type of business need. This is great news for franchisees in need of quick access to capital, or for those who need additional financing on top of what their franchisor or commercial bank will provide.
When you apply for franchise lending with an alternative lender, your application can be processed within a matter of hours, getting you cash in hand in as little as a couple of days. Even if you don’t qualify for a loan from a commercial bank or the SBA, you might have an easier time securing franchise financing with an alternative lender.
Of course, the accessibility of franchise financing through alternative lenders does come at a cost. You’ll typically find higher interest rates attached to alternative loan products than you would with commercial bank loans. But if a slightly higher interest rate is the key to opening your desired franchise, the cost may prove worthwhile.
The good news for franchisees is that while the costs of getting started with a franchise may seem overwhelming at first, the company’s proven business model and guidance will make lenders more open to your loan application. Especially for lenders who have a history working with a particular franchise, to some extent, if your application is good enough for the franchise, it’s likely to be good enough for the lender as well.
Meredith Wood is the head of content and editor-in-chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.