Financing options for purchasing a franchise

handshakeFor entrepreneurs, finding ways to cover their startup costs is often the first and greatest challenge they must overcome.

When estimating the initial expenses of starting a new venture, many entrepreneurs only scratch the surface, not realizing it takes more than office space and equipment to get a business off the ground.

Additional costs for things such as marketing, signage, training and consultation can quickly add up and put you in a tight financial spot.

When thinking about how much you can afford to invest upfront in your business, you may consider the option of buying a franchise, which is usually more cost effective than starting from scratch.

According to Franchise Direct, it can cost anywhere between $110,000 and $234,000 to purchase a franchise in the USA, compared to an estimated  $1,9 million for an independent business.

Franchise owners share the same benefits and rewards as independent business owners, with the only difference being that they have the advantage of an established brand, which makes it easier for them to step onto the entrepreneurial ladder.

Even though it requires less capital, many entrepreneurs lack the personal finances to start and run a successful franchise. Below, written in collaboration with F45, is a breakdown of the funding avenues worth exploring.

Franchisor financing

Aside from providing onboarding support, the franchisor can help you secure funding. They may have their own financing company or may offer you a loan through an affiliation with a third-party lender.

Remember that the money you’ll receive from the franchisor constitutes debt financing, which means it must be paid back with interest within a predetermined time frame. The loan can also have different characteristics. In some cases, you will only pay the interest charged on the loan, or make relatively small monthly payments for a period of ten years and settle the balance as a balloon payment.

Commercial banks

The second option is to follow the traditional route and approach your bank for a business loan.

Business owners buying into a franchise usually have a better chance of getting an approval, as they are backed by a proven business model. However, the bank still needs to perform a personal credit check to assess your creditworthiness. If successful, the bank will offer you a lump sum to be repaid in monthly instalments with interest over a set term.

Small Business Administration (SBA)

While the government does not offer financial aid directly to individuals, it does provide capital to initiatives such as the Small Business Administration to help business owners get a foot in the door. Much like an ordinary loan, the funds received must be repaid with interest, however, since the SBA assumes part of the risk, lenders are able to create more favorable repayment terms, lower interest rates and flexible timeframes.

Business partner

If your personal cash reserve isn’t enough, you can find an investment partner to help shoulder the financial burden. However, this option should be approached with caution. Things like share allocation and profit sharing should be put in writing so that each partner has clarity on their stake in the business.

A partner can make life difficult for you down the line, so be careful about who you choose to go with on this entrepreneurial journey. The ideal partner should be someone who has the same purpose and values as you to make the business succeed.

Keep in mind that startup costs vary among different sectors of the economy and among individual franchises, depending on the size of the business, the location, pre-opening expenses, inventory, and equipment needed. So, the best first step to take when deciding what type of startup funding you need is to evaluate the costs specific to your location and type of business.

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