Franchise businesses provide the safety of a proven business model with the added bonus of a built-in customer base. It might be a good avenue for you to take if you want to dip your toe in entrepreneurship while having a guided path to follow.
But, like starting any other business, a franchise business requires startup costs. Here are some tips on how to find funding for your franchise business.
Steps to finding franchise business funding
Step 1: Research
Research is going to be your best friend when beginning your franchise journey. Many businesses have certain requirements — net worth, minimum amount of cash required, etc. — for future franchise owners, making it helpful to know if you fit the bill.
Luckily, franchise information is easy to find on most corporate web pages. There are also a few franchise directories (such as Franchise Direct and Franchise.com) that have information about franchises that is categorized for more efficient searching.
Talking to other franchise owners might also give you a realistic idea of what you can expect. Also, it helps to know what the common pitfalls of a venture are before you put money into it.
Whether you’ve made the decision to start a franchise or are just curious, looking at all the franchises available and their stipulations will give you a better overview of what options are available to you.
Step 2: Determine your budget
It might be a good idea to take a practical approach. Maybe you dream of owning a McDonald’s franchise but don’t have the liquid capital of $750,000 the company requires plus the franchise fee of $45,000.
The wonderful thing about franchises is there are so many of them across various industries. So you can start small with a more affordable franchise and work your way up to a McDonalds.
When figuring out your budget, it might be helpful to ask yourself a few questions:
- How much cash can I put down?
- How much am I willing to borrow?
- Will my financial profile look good to a franchisor?
With these questions in mind, it will be easier to have an idea of what types of franchises you can afford. In addition to the minimum amount of cash required, expect to pay a franchise fee and royalty and advertising fee.
The franchise fee is a lump sum you’ll pay upfront and the royalty and advertising fee is a percentage taken from your sales on a weekly basis. We’ll go into financing options in the next section.
Note: Keep in mind franchises tend to want franchisees that have relevant experience. E.g.: A restaurant franchise will usually require some restaurant experience.
Next, you can take a look at the franchises you were looking at in Step 1 and eliminate the ones that are out of your price range. It might be helpful to put all of this information in a spreadsheet to make the next step easier.
Step 3: Reach out to the franchises on your list
Call, email and visit the franchises on your list to learn everything you can about them. Ask them any questions you have and get detailed information about the application process.
Some franchises require a basic application before you agree to an interview, while others require a business plan complete with a detailed overview of how you plan to succeed in a new market.
No matter what, a franchisor has to give you a Franchise Disclosure Document (FDD), which outlines details such as the history of the franchise, financial statements and disclosures such as if it’s ever gone bankrupt.
Step 4: Submit application and go through the interview process
It’s in the franchisor’s best interest that you know what you’re getting into as a future franchise owner. That’s why interviews are often a mix of phone calls, meetings and visits. Preparing questions in advance for these interactions would be a good way for you to get the most out of the interview process.
Step 5. Sign the contract and invest your money
Do a happy dance or whatever it is that helps you celebrate, because you are now a proud franchise owner.
How to find funding
The U.S. Small Business Administration has a franchise registry, which is an approved list of all the franchises they work with. Wingstop, the UPS Store and Tim Hortons are just a few of the numerous franchises on the list.
Franchise-specific finance company
Franchises are a multibillion-dollar industry, so it makes sense there are finance companies dedicated to them. These companies will either lend you money directly or connect you with lenders, streamlining the funding process.
Some franchisors will help you qualify for a loan and might even go as far as eliminating franchise fees.
If you have at least $50,000 in your retirement account, then you can use those funds to cover your franchise’s startup costs through an IRS program called Rollovers as Business Start-Ups (ROBS).
Getting a traditional loan for a franchise is just like getting any other business loan. It helps to know what lenders want and what your loan could cover. Some banks or credit unions offer commercial loans designed for franchises.
Also, it might be helpful to consider you’ll probably have a better chance of securing a loan if you’re going to run a high-profile franchise. Name recognition can go a long way.
The franchise industry has been growing steadily every year, allowing for more opportunities for people like you to run a business with established support. And while every business venture has its pros and cons, it might be a good option for you, especially if you have relevant industry experience. Keep in mind that, even with the backing of an established brand, running a franchise still takes as much work as any other business.