Wondering how to finance a franchise purchase? Finding financing for franchises is difficult. Many lenders are hesitant to finance franchises, especially newer franchises with no tangible assets or proven ability to generate positive cash flow. If you're buying a franchise, this article on franchise financing explain your financing options for buying a franchise.
After reviewing all of your options, you've decided the best way to launch your new small business is to open a franchise.
(article continues below)
But the decision to open a franchise is one thing. Financing it is something else entirely.
Unfortunately many potential franchisees make plans to open a franchise without giving any consideration to financing, even though financing is one of the major hurdles they need to cross before they sign on the dotted line and open their doors for business.
In fact, financing is one of the first things you should consider when determining whether or not to start a franchised business. Here are some tips on franchise financing that will guide your expectations and help prevent you from a major disappointment down the road.
The first question you need to ask yourself is whether or not you are financially prepared to purchase and own a franchise. What do your personal finances look like? Are you current on your bills? Or are you barely making enough to get by? Do you own more than you owe? All of these are valid questions that you need to ask yourself. Even if you don't ask them, rest assured that lenders will.
If finances are tight, chances are this is not the right time to buy a franchise. A better choice is to concentrate on paying off debt and establishing a positive cash flow. You should also have some savings set aside for the day you finally do buy a franchise because no reputable lender is going to loan you 100% of the funds needed to start a franchise. You're going to need to come up with some of that on your own.
Once you've looked at your financial situation and determined that now is a good time to buy a franchise, your next step is to begin to gather the financial information you'll need to obtain financing. Tax returns, account balances, debt payments and loan amounts are all fair game and you'll need to have them together in a comprehensible form when you apply for financing.
Even if you keep detailed financial records on your computer or through another system, lenders are still going to want to see documentation including tax returns and account verifications.
One of the advantages of buying a franchise is that nearly all franchisors offer some form of financing. What and how much they are willing to finance varies from one franchisor to another. However, if you intend to pursue franchisor financing, be aware of two things:
The process for obtaining financing through a franchisor is going to be very similar to the process you would go through with any other lender. If you're looking for easy financing, you're probably not going to find it through your franchisor.
The franchisor will most likely only loan you a portion of the funds you need to get started. This amount can range anywhere from 10% to 75% - hardly ever will a franchisor fully finance you for 100% of the needed investment.
Other Financing Options
Even if you can't get all the funding you need through the franchisor, you still have other options at your disposal. Many banks are willing to finance franchised small businesses, especially if you are willing to pursue a loan guarantee through the Small Business Administration (SBA).
Another form of financing can be found through investors – friends, family members, and acquaintances who believe in you and your ability to make a franchise work.
Want to Learn about Franchise Opportunities?
Browse tons of franchise opportunities in the Gaebler Ventures franchise directory: