As franchising is growing in popularity, many people are wondering what franchise financing looks like, what it entails and what the options are which is very valid considering that opening a franchise is notoriously pricey. Luckily there are plenty of franchise financing options available to help you get started. Here are 6 of the most popular options.
- Franchisor Financing
Believe it or not, franchisors have their own network of investors and financing options for franchisees. They often have partnerships with banks that offer financing based on the very specific needs outlined by the franchisor. They often tend to come with incentives for using their lenders (e.g., waived franchising fee, extra mentoring time, etc). Franchisors who don’t directly offer financing may be able to pair you with a lender they believe will work well for you based on your specific situation.
- Commercial Banks
Most owners find franchise financing through commercial banks because franchises are, typically, the ideal borrower. You have to have good credit, a down payment and a business plan with financial records, but the business you’re franchising plays a very important role in the approval process. Banks tend to place more trust behind the brand than the borrower.
- Alternative Lenders
Alternative lenders include any financial company that’s not a regular bank or credit union. They provide quick funding but are often very expensive and have strict guidelines and requirements. They also tend to require collateral of some kind in order to receive funding.
- SBA Loans
Franchises qualify for SBA loans as startups and businesses that will offer jobs and thus improve the economic wellbeing of the community. Due to the guarantee that SBA loans offer, the application and approval process is incredibly lengthy and highly competitive.
Sometimes getting a small amount of money from hundreds of people is easier than receiving a large amount of money from one person. Enter crowdfunding. Crowdfunding allows individuals to post their idea and business plan to a website and promote it in and effort to raise capital for the business. Investors are given rewards, opportunities or equity based on the investment level which is outlined on the website. Crowdfunding has been very successful in helping many businesses and franchise owners obtain the capital they need to get started.
- Friends and Family
Many franchisees are able to fund their franchises through capital received from friends and family members. There are many family members who start out franchising together, sharing the investment burden, in an effort to start something new for their families. This is the trickiest form of franchise financing because if something goes wrong there can be a serious fallout that causes major conflict across all levels of life. Write down all financial agreements and obligations and keep all promises.
Franchising is an excellent way to dive into entrepreneurship and finding financing is now simpler than ever. Contact KPI today to get the franchise financing you need.