Franchises can be expensive to open, but a financial shortfall doesn’t have to mean an end to your ambition. With the right funding strategy, you can still keep the ball moving on your future business.
But what strategy is right for you? That’ll depend on your present situation and the startup costs of your business. Below, you’ll learn about many of the franchise funding options you have at your disposal, and what it will take to start using them yourself.
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What Sources of Finance are Available to a Franchise?
Franchisor Loans
Depending on the franchise you’re opening, you may be provided with financing directly from the parent organization. Franchisors may also have preferred lending partners that provide competitive loans specifically to their franchisees.
SBA Loans
Small Business Association (SBA) loans are backed by the federal government, and they often have preferable terms compared to those of a commercial bank. That said, there are multiple types, but type 7(a) loans are commonly the go-to for franchisees given their high maximum loan sizes and less-restrictive terms.
Conventional Loans
You can always apply for a conventional loan from a bank. But you’ll need a solid credit score and a thorough business plan for approval. You’ll also likely have to offer some form of collateral.
Alternative Loans
Alternative lenders aren’t affiliated with the government, and they don’t operate with a full banking license. This allows them to provide funding quickly and with far fewer restrictions.
SBLOC
With a securities-backed line of credit (SBLOC), you leverage the value of your investments for borrowing purposes. This strategy doesn’t require you to sell any of your portfolio’s assets. However, given market volatility, you’ll only be able to borrow a percentage of their worth. Additionally, your interest rates will fluctuate based on the balance of your account.
ROBS
Rollovers as business startups (ROBS) is a program in which money is withdrawn penalty-free from a retirement account (ex: 401k) to fund a new business. While a viable option, this strategy needs particular due diligence given the IRS regulation overseeing the strategy.
Home Equity Loans
With home equity loans, you’re able to use the equity in your personal residence as collateral for borrowing. Home equity loans provide one-time lump sums with fixed interest rates. But you’re also able to utilize a home equity line of credit (HELOC). With this option, you’re able to receive a revolving credit line with variable interest rates.
Family and Friends
If you have friends and family that believe in you and your business, they can be a great first line of financial support.
Personal Savings
There’s always the option of tapping into your personal savings to help get your franchise off the ground.
Merchant Cash Advance
Through a merchant cash advance (MCA), a company gives you a lump sum of capital in exchange for a fee and a percentage of your future sales until the debt is repaid.
Factoring
If you already own a business, you can raise capital through the process of factoring. This is where you sell your accounts receivable (i.e. money owed to you on credit) to a third party known as a “factor.” So instead of having to wait for customers to pay you, you get paid by the factor at a discount, and the factor gets paid in full by your customers later on.
Personal Unsecured Loans
Personal unsecured loans can be acquired for a wide range of uses without having to provide a lender with collateral. With providers like Unsecured Funding Source, you can get the money you need for your franchise without having to pledge any of your personal assets.
How Much Can I Borrow for a Franchise?
The amount you can borrow typically depends on your loan type, credit score, and business plan. For example, the Small Business Association (SBA) has its own eligibility requirements, credit demands, and maximum loan amounts of $5 million. But other institutions will vary in their approval process, and loan amounts.
How Do I Qualify for a Franchise Loan?
First, you’ll want to make sure you qualify for the franchise itself. Many franchisors have requirements such as a minimum net worth and amount of liquid assets to get started. Once these are met, you can run through a checklist for exploring your further funding needs.
Checklist for Exploring Your Funding Options
By running through the following checklist, you’ll put yourself in the best position to explore your funding options:
- Contact Your Franchisor: Get in touch with your franchisor to see if they provide financing directly, or through a preferred partner lender.
- Know Your Credit Score: By running a credit report yourself, you can correct future lender mistakes and better understand your chances of approval.
- Create Your Business Plan: Having a detailed business plan shows you’ve done your homework, and makes you more attractive in the eyes of a bank.
- Determine Your Collateral: Loans may require collateral (e.g. property, cars, investments, cash) to be secured. The more collateral you have, the more likely your chances of approval.
- Check Your SBA Eligibility: Review the SBA Franchise Directory to see if your business qualifies for an SBA loan.
- Apply For Multiple Loans: Apply with multiple lenders to know what your options are, and how they compare.
Funding a Franchise Through a Loan from an Alternative Lender
Depending on your situation and needs, alternative lenders can often be a great resource for starting your franchise.
Alternative lenders have no bank affiliation and often operate entirely online. This enables them to provide capital quickly with far less restriction. You won’t have the same worries over having the right business plan or collateral for approval.
How Jumpstart Finance Can Help
At Jumpstart Finance, we love making our clients’ business dreams a reality. Our loans come with quick pre-approvals, competitive rates, and simple applications to get your franchise going in no time.
Your funding comes completely unsecured. We have no collateral or business plan requirements to apply. Additionally, our Jumpstart LoanSM is specifically designed to get franchises up and running.
If you’re ready to remove the headaches of funding your franchise, let’s talk! You can reach out to us at 866-475-4254, or apply online now.