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Franchise Financing

Franchise Financing

If you’re considering how you will finance the purchase of a new franchise, as well as the necessary remodel and setup costs, one channel that may have popped up in your research is funding offered by the franchisor.

We’re seeing more and more franchisors, in an effort to help new franchisees be able to afford to buy a franchise, offering loans. Not sure if the franchise you’re considering offers in-house funding? Check the Franchise Disclosure Document in Section 10, or the franchisor’s website to see if it does, and what the terms are.

What You Can Get

If the franchisor you’re working with does offer financing, you may have access to low-interest loans, equipment buy-back programs, and/or discounted franchising fees. Some franchisors offer special programs for franchisees who are willing to open up in non-traditional locations (think: a UPS Store on a college campus) or up-and-coming neighborhoods.

Few franchisors will finance all your startup costs because they do want an indication that you have some capital to invest and are serious about making your franchise a success. Typically you can get 15-75% of your total costs.

Things to Consider with Franchisor Funding

The rate you are offered with a loan through your franchisor may or may not be the best offer available, so be sure to also shop traditional banks and other financing options.

Get all the details about how financing works with your franchisor:

How soon will you be required to start paying back the loan?
Will the loan payments come out of your revenues?
Will you be able to borrow more money down the road for expansion?

As with any aspect of buying a franchise, read the fine print of any legal document you are asked to sign, and if you don’t understand it, ask a lawyer to also review it.

Tips for Getting the Most Out of Franchisor Funding

Before you apply for a loan, ensure
that you get the best deal possible on all costs that you will incur for startup and operation. Review the items you will be required to purchase in your Franchise Disclosure Document, then negotiate what you can with the franchisor.

The franchisor may be willing to reduce or even cover some of these costs for you (including the upfront franchise fee) if they are eager to bring you on as a new franchisee. If you are a veteran, be sure to mention that, since you will likely be eligible for a reduced franchise fee.

If the franchisor does not offer financing in-house, ask if they have preferred lenders. Sometimes franchisors who don’t offer funding partner with certain lenders that can offer franchisees a good rate. They may also have relationships with equipment leasing companies that you can benefit from.

Certainly, applying for franchisor funding makes the process of buying a new franchise easier, but be sure you are comfortable with the payment terms before moving forward.