How do you finance a franchise?

The initial investment needed to purchase, build-out, and open a franchised business often requires franchisees to consider financing options.

Because there are numerous options to choose from, entrepreneurs must approach the process carefully. It is important to consult with an experienced franchise attorney and accountant before making any final decisions.  Here are a few common financing options and what benefits they offer.

Personal Assets

Using personal savings, severance pay, a home equity line of credit, or even retirement funds can be attractive for franchisees.  It is important that these types of moves, and especially 401(k) rollovers, are organized correctly.  Franchisees must work with an experienced and knowledgeable Certified Public Accountant to avoid violations of IRS Rules and other pitfalls that can be very costly.

Commercial loans

Applying for a commercial loan at a bank entails a thorough review of your credit history and background. Banks want to see your plan for the business, as well as your personal record of handling debts and payment. Along with increasing the chance of approval, a good credit history can also help you receive good terms and interest rates, as the bank will view you as having less risk as compared to an applicant with a spotty financial history.  Attorneys who regularly represent franchisees can be helpful in answering questions and working with your bank.

SBA Loan

The Small Business Association (SBA) offers loans for franchise owners to use to finance their intial investment expenses, including furniture, fixtures, equipment, and supplies. SBA’s most common loan program, the 7(a) loan, is commonly used by franchise owners.  SBA loans are made by traditional lenders and backed by the SBA.  To be eligible for an SBA loan, a franchisee must be in a franchise system listed in the SBA’s Franchise Directory.  You will probably have to provide a personal guaranty and collateral.  An experienced attorney and CPA will help you with your lending options.

Franchisor financing

Some franchisors offer their own financing options that can help prospective franchisees secure the franchise initially and also cover the purchase of equipment and other essential expenses for the business. The terms of the financing agreement depend on the franchisor.  Initial information should be available in Item 10 of the FDD.

Crowdfunding

While it is a relatively new option, many business owners experience success through crowdfunding. This process entails appealing to members of the public online, either through a crowdfunding website or your own personal site or social media pages. Most entrepreneurs who seek crowdfunding offer some kind of incentive, such as special access to certain products or services. Transparency is key when crowdfunding, as you must always keep interested members of the public in the loop regarding how you plan to use their funds.  This makes crowdfunding a challenge for many franchisees.

Before signing any contracts, you must ensure the terms are amenable to you as an entrepreneur. That is why all franchisees should have their FDD reviewed and all contracts evaluated by an experienced franchise attorney.

Contributing Advisors