Franchise Financing: 5 Smart Strategies for Investors

The investments required for a franchise can be substantial, but these five strategies can help entrepreneurs secure the funding they need to get their new business up and running.

By Erica InmanStaff Writer

8:08AM • 04/07/24

While the franchising system does provide support and a proven-business model for ambitious entrepreneurs, the hefty startup costs can often pose a barrier to entry. Fortunately, franchise financing is available in many forms. Here are five smart strategies for investors who are looking to secure funding to support their franchise journey.

Know Your Financial Requirements

First and foremost, it’s crucial to fully understand the financial requirements of your chosen business venture. This will allow you to align the required funding amount with the appropriate financing option.

To understand the costs involved, review the brand’s Franchise Disclosure Document (FDD) carefully to get a grip on the required initial investment. Bear in mind that additional factors that may affect cost, such as location and real estate variables. Beyond the FDD, it’s a good idea to reach out to existing franchisees with the brand. Ask them if they found the costs listed in the FDD to be accurate and see if they can offer any insights regarding financial requirements you may have overlooked.

Industry Insight Matters

The industry in which a franchise operates significantly influences funding accessibility. Lenders are drawn to safer industries with built-in collateral, making certain sectors more favorable for financing opportunities. For instance, a business that includes real estate as collateral might be more appealing to lenders than a business with no discernable collateral. It’s also wise to select an industry that aligns with your expertise, experience or educational background. This will not only improve your chances of success with your business, but also enhance your credibility with lenders.

Understanding Factors Affecting Funding Approval

Apart from demonstrating expertise in your given industry, there are a few other things you can do to sway lenders in your favor. Maintaining a credit score above 700 and showcasing a healthy debt-to-income ratio are crucial. Lenders also tend to favor applicants who have invested a significant percentage of the project's total cost, showing they are dedicated to succeeding. Demonstrating a secondary source of income and providing collateral, especially in industries involving real estate, are also great methods for impressing potential lenders.

There are other proactive steps you can take to enhance your chances of success with financing. Meticulous preparation, including organizing financial information, completing required forms promptly and showcasing efficiency in the application process will help the lender establish confidence in your abilities.

Consider Traditional Loan Options

There are a wide range of loan options for franchisees. Larger projects exceeding $400,000 or so may necessitate Small Business Administration (SBA) or USDA loans. Be sure to research all of the options carefully and speak with an expert for personalized advice.

Consider Diverse Financing Options

For more modest amounts, creative approaches like equipment financing coupled with working capital from personal loans may be more attainable. Rollovers as Business Startups (ROBS) or Home Equity Lines of Credit (HELOCs) are great options for creative financing. For those with community-minded concepts, crowdfunding may even be suitable.

Collaborating with a reliable partner, whether a co-owner or financial service provider, can also relieve financial burden and provide an avenue into franchise ownership.

Secure Funding and Achieve Your Goals

These five smart strategies can help those seeking franchise financing achieve their entrepreneurial ambitions. Whether it's tapping into government-backed loans, exploring creative funding methods like ROBS or collaborating with industry-savvy partners, the key to success lies in informed decision-making and strategic planning.

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