7 Best Financing Options for a Business Franchise

A business franchise is a great investment, because you get the independence and flexibility of owning a small business, while offering the infrastructure and support of a large corporation. Having said that, it takes a lot of capital to open a business franchise. You’ll often need to come up with a big franchise fee along with ongoing advertising costs and royalties.

If you need to take out a loan to open a franchise, here are seven of the best financing options for a business:

Option 1 – Franchisor Financing

If you require funding to buy a franchise, your first financing option is talking to your prospective franchisor. Most corporations with franchise business models will offer financing solution for their franchisees, either by providing capital from the corporation or through partnerships with certain lenders.

One major benefit of utilizing franchisor financing is that you will most likely be able to not only borrow for the franchise fees but you could possibly also buy other equipment and other resources you need to be able to start your business.

If you’re investing in a franchise with a franchisor who offers a financing program, it’s very likely you won’t need to go elsewhere for financing options.

Each financing agreement will differ among franchisors. but some are willing to take as much as 75 percent of the debt burden from the new owner. You might get deferred payments while you start up your business, or the franchisor might set up repayment on a sliding scale. Always have your accountant or business attorney go over the terms of the financing and franchise agreement to make sure you understand all of the terms before you sign anything.

Option 2 – Canada Small Business Financing Program (CSBFP)

This is a great financing options for a business operating in Canada. The CSBFP is a loan- and loss-sharing program between the banks and the federal government, commercial lenders, and credit unions from across Canada. It was set up to help small businesses, and it is one option available to prospective franchisees.

While they can’t be used to help pay for the franchise fee, you can use it to buy or improve land, equipment, or leasehold improvements. The loans can be used to finance up to 90 percent of these costs.

Option 3 – Bank Loans

Another option is to get a term loan from a bank. Under a term loan, the bank gives you a lump sum of cash up front that you then have to repay, plus interest on a monthly basis for a set period or term.

When you go to apply for a bank loan to buy a franchise, the lender ill want to look over your personal credit history and business plan. Overall, the higher your credit score and the stronger your financial history, the more likely you will be to get a better interest rate and terms for your loan.

Option 4 – Crowdfunding

If you can’t obtain financing through the franchise or from a bank, another option is to raise financing through crowdfunding. You have a couple of options here: look for websites that crowdfund for specific businesses and industries to apply for funding, or set up and promote your own crowdfunding page.

Option 5 – Alternative Lenders

Alternative lenders might be an alternative option for you if you need money to franchise your business quickly, or if you want to secure additional funding on top of your commercial loan. Alternative lenders usually have less severe requirements and shorter turnaround times compared to traditional banks, but they are more expensive.

Option 6 – Loans from Friends and Family

One of the most common financing options for a business is by borrowing from family and friends. This can be done in any number of ways, such as asking for a gift, borrowing money outright, or bringing on the lender as a business partner. Most loans from friends or family tend to have lower interest than bank loans, but keep in mind, if things go wrong with your repayment, you could lose friends and cause rifts in your family.

If you do go with a loan from a friend or family member, make sure to write up a contract that clearly states the terms of repayment and any expectations. As long as all parties fully understand the agreement before they sign, it’s less likely that you’ll run into disagreements and breakups down the road.

Option 7 – Franchise Financing Company

There are several companies that specialize in financing new franchisees. Most of these companies hook up franchisees with lenders depending on financial need, and some franchise financing companies make the loans directly to the new franchisee.

Whatever decision you make, be sure to compare rates among lenders and other sources of financing so you don’t end up paying more in the long run. With a solid financing option and the safety net of a large company behind you, your business will be up and running in no time.