Franchise Financing 101: Finding and Securing Available Funds

Franchising provides entrepreneurs with a great opportunity to start their own business with the support of a franchisor, a proven business model and established brand recognition. Sometimes, however, due to high startup costs, this option can feel out of reach. Fortunately, financing options are available to franchisees and can be fairly accessible so long as you know where to look and how to prepare yourself. 

Paul Bosley, owner of healthclubexperts.com and managing member of Business Finance Depot, has experience in partnering with several national franchises to assist new entrepreneurs in acquiring the capital needed to launch their business, as well as in helping existing business owners finance the expansion of their current businesses. 

1851 Franchise spoke with Bosley to get expert advice on how franchisees in the making can put themselves in the best position to secure funding for business ownership. 

What Financing Is Available for Franchisees?

Before you start searching for funding, you’ll need to know how much you need. That will determine what type of funding you apply for.

“For projects over $400,000 roughly, franchisees will need SBA or USDA loans,” explained Bosley. “SBA loans are the most common. If a franchisee needs an amount under $400,000, that is too small for an SBA loan.”

Even without a small business administration loan, that does not mean that franchisees in search of less than $400K are out of luck. It just means they have to be a little more nimble in securing financing.

“There are a lot of different, creative ways of cobbling together funds,” explained Bosley. “One of them would be equipment financing for all the equipment that they need, and then combining that with various ways of getting working capital.” 

Bosley explained that personal loans can be a useful option for franchisees, including Rollovers as Business Startups (ROBS) and Home Equity Lines of Credit (HELOCs). ROBS funding allows borrowers to use retirement funds without incurring taxes to fund startup costs. However, this can be risky as your retirement funds are on the line. HELOCs allow borrowers to tap into the value of a property they own to use it as collateral. This can be risky as well. Either of these options should be carefully considered against your financial security and likelihood of success. 

Beyond personal loans, Bosley suggested that some commercial loans are a possibility for candidates with very good credit. Bosley also admitted that, in a way, it is actually easier to secure the financing you need when the amount required is higher. Other than the amount you are looking for, there are several other factors that affect your ability to secure funding.

The Number One Factor That Affects Funding: The Industry

For two reasons, the primary factor that will affect your ability to secure financing is the industry in which your business is situated. First, there’s the risk-level and chance of success within the industry itself. Second, there’s your likelihood to succeed given your industry experience and knowledge.

While lenders might not come right out and say it, they absolutely favor safer industries and are more likely to offer financing to business owners within them. For example, some business ownership opportunities have collateral built into the model, so those industries are safer for lenders.

“It's much easier to get RV park financing than it is to get gym financing because there's real estate included [in the former] and that's collateral,” said Bosley. 

If you’re still considering franchise ownership opportunities, you should take this into consideration. Moreover, you should evaluate your own industry experience as thoroughly as lenders.

“The best thing would be for people to apply for franchises that are in an industry that they have experience with: either working in the industry or ownership,” said Bosley. “It also looks good to lenders when a person has an educational background in the industry.”

There is one experience that trumps this requirement of an industry-specific background, and that is previous business ownership experience. 

“If you've got a background in a business that you've been successful with, that's really important to a lender because now they know how to run a business,” said Bosley. “You just don't necessarily know how to run this new particular business, but that's the role of the franchisor to teach you how to run that business.”

If you’ve already chosen your industry and have little knowledge or experience, not all hope is lost. Bosley suggested considering ways you can build up your resume to show lenders you are working hard to gain insight into the given industry to increase your chances of success.

“For instance, a person that wants to open up a gym can get a personal training certification or if you're trying to open up an RV park, get certified RV parks through the trade association,” said Bosley. 

Other Factors Affecting Funding

Bosley explained there are several other factors that affect your likelihood of securing funding. The more you know about what your lender is looking for, the more you can prepare yourself to appear favorably. 

Credit Score

You should aim for a minimum of 700 when it comes to your credit score. A good credit score tells lenders that you pay your bills on time and have a general handle on your finances. Beyond this, lenders will look at your debt-to-income ratio.

Your Equity Injection

Your lender will be more likely to consider granting you funding if you also have skin in the game. For example, SBA loan applicants typically need to invest 10% of the project total cost. 

A Secondary Source of Income

It makes sense that lenders would also be interested in other sources of income that could help you stay financially secure while starting up a new business. Perhaps you are keeping your current job as you launch your new franchise, or perhaps you are married and your partner’s income can help support your family. 

Collateral 

SBA loans of over $350K typically require the borrower to use their business, as well as personal or commercial properties they own, as collateral. 

“If you don't have the collateral to put up or you don't have equity in your home, that makes it a much riskier proposition for the lender,” explained Bosley. “In turn, they will now look even harder at what you've done to prepare and understand the industry because they obviously don't want you to fail … there's no collateral as backup.”

For this reason, businesses that include real estate are favored by many lenders. 

Setting Yourself Up For Success

While a lot of factors in securing financing might be beyond your control, Bosley suggested focusing on the factors you can control to increase your chances of success. 

“You can control how you prepare by getting your financial ducks in a row,” explained Bosley. “There are the standard forms that the SBA requires you to fill out for listing all your assets and ties. You should prepare your financial information so that you're able to submit the application in a relatively short period of time.”

Returning the forms and having all of your information ready and organized can help your lender build confidence in you as someone who is capable and efficient.

Where To Find Financing

Your search for financing will either start directly with a lender or with an agent like Bosley. The advantage of working with an agent is that they provide guidance and have extensive networks of lenders, so they can match you with the one they feel is most likely to meet your needs. 

“We coach people through the process,” explained Bosley. “We provide documents that can help them, such as financial projections and things like that. We decide which lender is the best fit. If you're, for instance, looking to finance something that's a half a million dollars and you have no collateral, I know a lender that would probably consider your application if you have good credit, a good income and a decent amount of cash.”

Agents also are familiar with the general franchise space and specific franchisor’s preferences.

“We work with a lot of franchisors,” said Bosley. “They normally have a list of companies to work with. For instance, I'm working with a Massage Envy right now, and we're on a list of maybe three or four different companies that they refer people to.”

Whether you decide to go directly to a lender or through an agent to secure your financing, ensure you have done all you can to showcase your knowledge of the industry, prepare all of your financial documents and get yourself as organized as possible to appear favorably to your potential lender.