What is Franchise Financing?
Owning a franchise is a unique way to start your own business with a business model that’s already been proven to work in other markets. Whether you want to open a Subway, 7-Eleven, McDonald’s or something else entirely, you will need to know where to get best franchise financing to make your dream a reality.
When it comes to the best franchise small business loans and other franchise financing, you need to know that both traditional and more unique financing options exist and both should be important considerations in your business planning process.
What is franchise financing?
A franchise is a business that you own that is part of a larger network of businesses, all of which operate under the same name or brand. Some of your favorite stores and restaurants are franchises, like Dunkin’, Jimmy Johns and the UPS store, with each store owned and operated by an individual known as the franchisee. The larger brand helps out the individual stores with marketing, business plans, trade secrets and other resources to help them succeed.
While franchises are a smart way to ensure you have a solid — and proven — business plan in place, buying into these businesses can be expensive. Franchise funding is the term given to the process of securing a loan to pay to get your franchise business started. Some of the best franchise financing may be available through an SBA loan, a commercial bank loan or directly through the company you are purchasing the franchise from.
These franchise financing sources provide you money to cover your initial franchise fee, recurring franchise dues, marketing costs, required purchases and other costs necessary to get your business off the ground.
Where to find financing to open a franchise
Finding funding for your franchise can happen in a number of places — some traditional places of lending and some not. Many of the banks and lenders that offer business loans for other purposes may extend the same financing for franchises. For example, Bank of America, Chase Bank and Wells Fargo offer commercial financing that you can use to fund your franchise.
What you may not be aware of is that many franchises offer financing directly in house. This means that the same company you are buying into may have an in-house option to help you cover the costs of your investment. For example, The UPS Store, Gold’s Gym and Meineke offer in-house options to help you get your business started.
Costs of opening a franchise
Opening a franchise can be more expensive than you think when you factor in all of the different associated costs. This doesn’t mean opening a franchise can’t be highly lucrative — it just means you need to have a complete picture before moving forward. Additionally, knowing all your costs will help you get the right amount of franchise financing.
- Initial franchise fee — You will need to pay an initial fee to purchase your business from the franchiser. Generally, these fees span from $25,000 to $50,000 but may be larger or smaller based on the scope of the business you are buying into.
- Recurring franchise fees — Sometimes referred to as royalties, these are ongoing fees you will pay (usually monthly) to the franchiser to continue using the business model the company built. Generally, these fees are a percentage of sales and will vary greatly from business to business.
- Marketing fees — The franchiser may handle marketing for the brand as a whole. Because you will be benefiting from this, you may have to pay a fixed fee or percentage monthly or annually to help cover these costs.
- Required purchases — Some franchises may require you to buy certain goods or services to use with your store. This will be spelled out in your contract and is certainly something you are going to want to be aware of.
- Build out costs — Once you buy the business, you will need to build your location. Some franchises will help immensely with this, and others may leave a lot of it up to you. Additionally, the cost may be included in your franchise fee, or it may be an additional cost that you have to pay. Find out and make sure you include it in your plan when securing franchise funding.
- Hiring costs — There are costs associated with hiring and training employees. Again, the franchisee may help, but as the business owner, you can always expect the costs of things like this to fall on you. Hiring costs also vary greatly based on your area, the type of business and the necessary skill sets workers will need.
Top small business loans and lenders for franchises
You have a lot of options when it comes to finding the best franchise financing or the best franchise small business loans. Securing the right source of funding is one of the most, if not the most important step of starting a new franchise business.
- CIT — No matter what size of franchise you’re looking to undertake, CIT may be able to help. The company offers loans from as little as $2,000 up to $3 million. These non-SBA loans can help with opening a new store, modeling an existing franchise, buying out a partner, upgrading equipment and even providing working capital. CIT will work with new franchisees but is also a valuable resource for existing franchise owners.
- Bank of America — This big-box bank takes a highly tailored approach to offering franchise financing to prospective new business owners. Bank of America’s franchise financing department will help you select the right borrowing medium, assist you in optimizing your cashflows and help set you up with employee benefit plans. There is no application fee, terms available up to six years and no prepayment penalties.
- Citi Capital Funding — Franchise funding is available through Citi Capital Funding with flexible terms and some attractive features. Loan terms are available up to 25 years, with loan-to-value ratios as high as 90%. Rates start as low as 6% and are available with a fast application and approval process.