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How To Secure Financing When Buying a Franchise

The majority of franchisees will need to seek funding in order to get their franchise off the ground. SBA loans are a common option, but that is not the only way.

Franchising is a great way to take control of your future, but it requires a substantial investment — of both time and money — upfront. In many cases, a franchisee will need to seek some sort of financing to cover things like the initial franchise fee, real estate costs, build-out and more.

“The majority of people are getting some sort of financing,” explained Joshua Marks, an attorney and owner of JM Law Group. “Maybe 80%, if not even more, will need support. I don’t get very many calls from people who can fund the entire startup out-of-pocket. And I’m not just talking about the initial franchise fee, but also build-out costs, startup costs, equipment, working capital… the whole ball of wax.”

Marks added, though, that there is a bit of a caveat to this statement. Many people who are coming into franchising later on in their lives choose to roll over their 401ks. So, there is still a bit of paperwork involved, but they aren’t taking a loan, either. 

“That seems to be increasing as you see older people, specifically from the corporate sector, choosing to get into the franchising world,” he explained.

However, if you don’t have a hefty savings account or 401k to roll over, loans are not impossible. According to Marks, one of the most popular sources for loans is the SBA. Some people also use other forms of traditional bank financing.

“Typically, rates through the SBA have been better than other forms of financing, and there’s often a lower amount of equity or out-of-pocket required from the franchisee,” Marks added.

The SBA also maintains a list of franchises that are pre-approved, meaning that if a franchisee is planning to invest in any of the options on the list, it has already been vetted and determined to meet a certain level of standards as set by the SBA.

Throughout this entire process, Marks says one of the most common shortfalls he sees is franchisees not fully understanding the cost associated with the funds they are borrowing. At times, there will be things like “bank’s attorney fees” or prepayment penalties. Even the most well-versed business people can skip over terms like these, especially when the associated costs are not explicitly spelled out.

“The bank will oftentimes provide a term sheet and a financing commitment later,” Marks said. “A lot of times, people don’t sit down and take the time to either understand or get some actual hard numbers from the bank regarding what they can expect and the total of all of the costs associated with the loan at the end of the day.”

If there is one overarching piece of advice, Marks says, it’s that you have to be extremely organized. When pursuing financing through the SBA, or really any type of major financing through other routes as well, there will be a lot of documents involved. After you evaluate which financing routes will work best for you, begin to gather your data. You’ll need financials, tax returns, bank statements, guarantor information and maybe more. 

“Oftentimes, the individual is required to guarantee the loan, so you have to think about your personal exposure in undertaking these loans,” he explained.