The 10 Best Options to Finance a Franchise Business

If you’re an entrepreneur who aspires to break into the world of business ownership, then you may have already considered opening your own franchise. However, franchises are no small investment. If you’re worried about not having enough capital, don’t be discouraged! The world of financing offers a multitude of options that can turn your dream of business ownership into a reality.

Whether you need funds to cover the entire franchise purchase or just a portion of it, there’s a solution out there for you. With that in mind, we’ve curated a list of the best financing options for franchising a business.

Direct Franchisor Financing

The first place you should look for a financing solution is through the franchisor you’re looking to partner with. Many franchisors often offer their own financing programs or work with third-party organizations to provide financial assistance to potential franchisees, making it easier for you to take your first step into the business world.

SBA Loans

The Small Business Administration (SBA) provides three primary business loan programs that are specifically designed to support small businesses, including franchises. These include the 7(a), 504 and microloans. Additionally, because these loans are backed by the government, they typically come with favorable terms and lower interest rates, making them an attractive choice.

Conventional Bank Loans

Banks offer various conventional bank loans that are tailored to meet the specific needs of business owners and work just like any other type of loan. Depending on your financial situation, the bank will offer you a sum of cash upfront, which you will then have to repay, plus interest, in installments. However, unlike SBA loans, they may not have as favorable terms because they tend to be riskier for lenders as they do not have federal backing.

Rollovers as Business Startups (ROBS)

ROBS financing enables you to use your retirement funds without incurring taxes or penalties to fund your franchise startup costs. But, as U.S. News reports, ROBS can be risky.

“Although you are not borrowing and paying interest as with a loan, you are putting your retirement on the line and passing up potential investment gains with ROBS,” according to the news report. “Essentially, you’re betting that your franchise business is a better investment for your retirement funds than any other option.”

For more information on Rollovers as Business Startups, click here.

Credit Union Loans

Loans from credit unions work similarly to conventional bank loans. And as Small Business Trends notes, credit unions typically offer the same loan products as banks with (usually) lower interest rates and fees. This is because credit unions, unlike banks, are owned by their members and exist to serve their members’ best interests.

Home Equity Loans

For homeowners, leveraging home equity financing can also be a viable and flexible option. Home equity loans and home equity lines of credit (HELOCs) allow you to tap into the value you’ve built into your property and use it as collateral to secure funds for your franchise venture.

This can also be risky. If you fall behind on your loan payments, you may put your home at risk of foreclosure. Utilizing a home equity line requires significant consideration.

Equipment Leasing

If your franchise requires specialized equipment or machinery, consider equipment leasing as a financing option. Instead of purchasing the expensive equipment upfront, you can lease it from a reputable provider. This will allow you to conserve your capital and spread the cost out over time. It also provides you with flexibility, as you can upgrade to newer equipment when your lease term ends.

“Almost any type of equipment can be financed if used for a business purpose,” said Mark Kelly, the senior vice president and business development manager at Univest in an interview with U.S. News. “Whether it’s health care equipment, industrial, construction, energy conservation, technology, titled vehicles, furniture or landscaping equipment, all businesses have equipment needs.”

Find a Partner

Another way to afford to open a franchise is to partner with someone reliable. By finding someone who shares your vision and can contribute financially, you can pool resources, expertise and workload to create a successful business venture. Sharing the financial burden with a like-minded partner makes starting a franchise all the more achievable.

However, as America’s Best Franchises notes, there are pros and cons to franchising with a business partner.

“Being in a partnership means you can’t call all of the shots,” writes America's Best Franchises.  “Sometimes your partner will be the decision-maker. And you might not agree with every choice. If you are prepared to handle quarrels maturely and share responsibilities, business partnership could be right for you.”

Crowdfunding

Crowdfunding presents a creative and innovative solution to secure funds for your franchise venture. You can set up a crowdfunding page on popular platforms like SeedInvest or Fundable, and promote your interests and goals to specific organizations and communities. By promoting your franchise idea to an audience, you’ll increase your chances of attracting passionate backers who believe in your vision. While it’s easier said than done, as Entrepreneur notes, taking the crowdfunding route can at least eliminate the challenges you may face when seeking a loan through a traditional lender.

“Crowdfunding is a great option if you have a blemish or two in your financial history and aren’t satisfied with the loan products and interest rates for which you qualify,” writes Entrepreneur.

Friends and Family

Last but not least, when all else fails, you can always seek out financial assistance from your friends and family. If you choose to go down this path, there are some pros and cons to consider. For example, as ADP notes, if you borrow money from loved ones, you don’t have to worry about your credit or paying interest. However, the cons can be fairly significant, and if you don’t pay back your loan, you run the risk of negatively impacting your personal relationships.

Before you ask your loved ones for money, consider the potential consequences and ask yourself if it’s worth it.

The Path Forward

Regardless of the financing option you choose, there are many paths forward to help kickstart your journey into the world of franchising. Each option demands careful consideration, but with determination and informed decision-making, you can be on your way to owning and operating a successful franchise venture.