How To Fund Your Franchise?
Offering both the adjustability and independence of being a small business owner, plus the name and infrastructure of a large corporation, a franchise can be the best opportunity for someone who is interested in becoming an entrepreneur.
For opening a franchise one requires a significant investment of capital -- often including a heavy franchise fee along with monthly royalties and advertising costs. Everyone is not that rich to have access to that kind of cash. So, if you need a business loan to finance your franchise investment, you might find it challenging, difficult to navigate the various options available.
The process of financing your franchise business is very easy, here are six most popular franchise financing options.
1. Franchisor financing.
If you need finance to purchase a franchise, you should first have a chat with your prospective franchisor.Many organisations with franchise business models offer tailored financing solutions that are exclusively designed for their franchisees,they provide funds either through partnerships with specific lenders or by providing capital directly from the corporation. This is one of the most common and easy ways to finance a franchise and offers great advantages. Gold’s Gym, UPS Store, etc all offer finance options to their franchise owners.
An advantage of using franchisor financing is that it becomes a one-stop shop for everything you want. Many of these programs offer financing not only for the franchise fees but also to purchase equipment and other resources you need to start up the business.
2. Commercial bank loans.
Next common way of funding your franchise is through a traditional term loan from a bank, a bank or alternative lender offers you a lump sum of cash up front, which you then repay, plus interest, in monthly installments over a set period of time.
When you apply for a commercial bank loan to purchase a franchise, your lender will want to review your business plan and personal credit history. The lender will use these documents to assess your creditworthiness. Essentially, through this process, the bank is trying to determine whether or not you can reasonably afford to repay the loan you’re requesting, and thereby how likely they are to get their money back.
4. Alternative lenders.
If you need money to fund your franchise quickly or want to secure additional capital to supplement your commercial or SBA loan, you may want to consider applying for franchise lending through an alternative lender.
Typically, alternative lenders have less stringent requirements and shorter turnarounds than traditional financing options. They offer a variety of loan options like equipment financing, business lines of credit and even term loans. That said, this access and convenience may cost you. Alternative loan products tend to be more expensive, offer shorter repayment terms and lower loan amounts than their more traditional counterparts.
If franchise financing isn’t available and bank, SBA, or alternative loans don’t pan out, obtaining financing for your franchise may require some creativity. One of the newer and more creative ways of financing a franchise is through crowdfunding.
You might choose to set up and promote your own personal crowdfunding page or look towards specific organizations that crowdfund for businesses and franchises. There are also websites that crowdfund for specific industries and business types, which they then lend those funds to people in need of financing.
Crowdfunding is a great option if you have a blemish or two in your financial history and aren’t satisfied with the loan products and interest rates for which you qualify.
6. Friends and family loan.
Believe it or not, one of the most common ways to finance a franchise is by borrowing from your friends and family.
Whether you choose to borrow money outright, ask for a gift, or bring a friend or family member on as your business partner, these types of loans generally come at a very good price. That being said, some come at the cost of lost friendships and family disagreements.
If you do choose to take a loan from a friend or family member, be sure to write up a contract that includes repayment terms and expectations. If everyone understands the agreement before signing, breakups and disagreements will be less likely later on.
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Written By: Moni Evangilin
Written By: Yukta Palekar
Written By: Shivani Kumari
Written By: Yukta Palekar