bannerFranchisee Stories

How To Get Financing To Buy a Franchise

From commercial and SBA loans to leveraging 401(k) accounts, here are some tips into how franchisees can finance their new business.

When looking at a franchising opportunity, understanding the different types of loans available makes a world of difference. 

Financing a franchise is not one size fits all — what’s best for one franchisee is not always feasible for another. Often, financing is the single biggest obstacle prospective franchisees face in the industry. Typically, financing options range from commercial and SBA (U.S. Small Business Administration) loans to tapping into 401(k) accounts through rollovers as business startups, or ROBS.

That’s where franchisors come in. Each brand has its own unique way of guiding its franchisees through the financing process. Some companies get involved with financing from start to finish. 

“Franchisees need help and guidance. A lot of times they’re first-time business owners who have never applied for a commercial loan before. There’s quite a bit of fear in that process,” said Jonathan Pace, co-founder of BizFranHub. “There a number of franchise brands on the SBA approved lending registry, and they can help walk the franchisee through the process.”

Brands who are on the SBA approved lists should provide their prospects with a list of lenders who they have successfully worked with in the past. When banks are familiar with a franchisor’s business model and trust that it’s a good investment, they’re more likely to approve a new loan.

“One of the best financing options is through the SBA 7(a) loans, they also have the SBA express loans for over $150,000, which can also go up to $5 million,” said Pace. “With COVID-19, interest rates are at an all-time low, and the government has been offering different promotions through the CARES Act. Those SBA 7(a) loans are great for start-ups right now.”

It’s also key for franchisees to think ahead when it comes to financing. Prospects need to establish a relationship with a lender whether they’re looking to open their first franchise or are considering taking on more than one unit. Without that connection, a franchise will never be able to expand its business.

“The SBA doesn’t actually do the lending, the bank does, but the SBA offers the guarantee,” said Pace. “For those pre-approved franchises, prospects may only have to put down 30% depending on their credit score, experience and other factors. That is why it is the most popular financing option.” 

Depending on the situation, Pace also points to the rollover as business start-ups compliance project as a good alternative that not all prospects know about. “ROBS allows prospects to use their 401(k) retirement savings and roll them over into a new business,” said Pace. “Then, you can use those funds from your retirement account to fund the franchise.”

Financing doesn’t need to be left up entirely to the banks — there are also a number of financial partners available to potential franchisees. Companies like BoeFly help match franchisees with the financial option that is most likely to work out for them. But no matter what information franchisors provide, or what lender a franchisee pairs up with, the decision lies with one person: the prospect.

This cursory understanding of financing options better equips prospects to start the process and gets them one step closer to the business of their dreams.