There are many benefits of establishing a franchise business as it gives you the chance of working for yourself but at the same time, you also have access to know-how and the resources and reputation of a franchisor. With proper planning and execution, you will be able to get the satisfaction of seeing your operation grow. However, there is one major hurdle, and it’s that you require a large sum of money to become a franchisee. You need to make the initial payment and have the budget for the royalty fees as well as have a decent enough financial cushion to manage the working capital requirements.
You can tap several sources for financing a franchise purchase, but here’s some preparatory work to do before you go knocking around.
Make sure you have your business plan ready. You are thinking smart if you get professional help to prepare this as you’d want the lender to know that you are serious about this and know what you’re doing.
A high credit score is useful, but even if you don’t have it, you can still get by if you have a satisfactory explanation for it. Proof of equity is significant because no lender will fund you 100% and you need to make at least 25% of the total funds.
Sources of Finance
Your most economical option is to approach the traditional sources such as the bank or a credit union. Although it may take more time for your proposal to process, the rate of interest will still be the lowest comparatively. You should keep in mind that the choice of franchisor will influence the bank’s decision. As long as the franchisor is a well-established brand with financially successful franchises, your chances of getting a loan are higher.
If the bank is hesitating, you can reach out for a Small Business Administration loan. It’s a government institution which doesn’t make the loans itself, but it guarantees the ones made by lenders. Meeting the SBA criteria means that the bank would be given a guarantee of 75% of the loan amount. SBA loan is a good option for entrepreneurs who are setting up the first franchise.
The franchisor can be a convenient option for financing, but you’ll have to meet their eligibility criteria to get funds. They can also arrange the funds through a third-party lender. Franchisors often also have arrangements with leasing companies so that you can obtain the equipment you need without a large amount of money.
Many prospective franchisees consider approaching family or friends for the funds. However, always remember that there is a business risk involved. It’s better to go for a bank loan than risk someone’s life savings.