Franchising 101: 3 Ways Franchisees can Obtain Financing

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Buying a franchise is a good business move. You can get almost all the benefits of opening your own business minus the risks and uncertainties that come with a startup. Now, you’ve already settled with a location for your deli & sandwich franchise and which brand you’re going to buy. But where do you get the money?

Consider the following options to finance your dream franchise.

Franchisor funding

If you need financial help to set up shop, the first person you should talk to is your franchisor. After all, you’re buying their franchise. Long-established corporations normally have financing solutions tailored to franchisees. The funding can either come from partner lenders or from the corporation itself.

This is the most common financing option for franchisees, and it has plenty of perks as well. One benefit of franchisor funding is that you can use this for everything you need, not just the franchise fee. The corporation’s funding program can also offer to finance your equipment, supplies, and other resources you need to start your business.

Working with your franchisor regarding finances can be advantageous since they know the business better than anyone. The franchisor will be able to guide you through the financial risks that come with the franchise you’re buying.

SBA Loan

If your franchisor doesn’t have a financing system in place, you can turn to the U.S. Small Business Administration (SBA). SBA doesn’t provide the funding directly, but it connects businesses with lenders to make it easier for them to get a loan. So the coverage and amount of the loan still depend on the lender.

The appeal of an SBA loan is that the organization reduces the risk for the lender by shouldering a portion of the loan amount. Then the lender, since the client becomes less risky than usual, decides to lower the interest rate and provide longer payment terms.

The first step is to join the SBA Franchise Directory, which is the list of franchises that the SBA reviews to know which ones are qualified for financial assistance. You also have to meet the Federal Trade Commission’s definition of a franchise. To join the directory, you have to submit the franchise agreement document, franchise disclosure document, and all the other papers the franchisor required you to sign.

Traditional or Commercial Bank Loan

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An SBA loan can be hard to secure since it has plenty of requirements, and a lot of the businesses are applying for it. An option would be the traditional bank loan. In a term loan, the bank will provide you a lump sum in cash, which you need to repay with interest. The lender will set the repayment period depending on your financial capability.

The potential lender will review your business model and credit history to assess your creditworthiness. This will help the lender determine if you can afford to repay the loan amount you’re requesting, thus know how likely they are to get their money back.

The stronger your credit score is, the more likely you are to get a loan that has a good interest rate and payment terms.

The capital of any franchise business can be difficult to put together, especially when you’ve minimum resources. But if you’re willing to put in the sweat, you can fund the franchise you want to buy and operate.

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