How to Finance a Franchise

After due diligence is done, and you have decided to start your own franchise, it is time to consider how you will finance your new business venture. What types of loans are available to finance a franchise?

Depending on the franchise you have chosen, and the amount of liquid cash you have on-hand, you could be looking for a loan from a few thousand dollars, up to tens of thousands. There are a few great franchise financing options you will want to consider once you have decided to buy a franchise.

Financing a franchise with a commercial bank loan

Many new entrepreneurs seek a traditional bank loan to finance their franchise business. A traditional commercial bank loan is much like financing a car or your home’s mortgage. With a commercial loan, you will receive a lump sum of money, and pay it back in monthly installments, plus interest. If you choose to apply to a bank to finance your new franchise, the bank will not only do an in-depth credit history check, but they will want to review your business plan too. Your credit history will weigh in on the bank’s decision to fund your new venture and will also help determine the interest rate you are offered. It sands to reason, if you have an excellent credit history, you will receive a lower interest rate for your loan, but it is not guaranteed.

SBA loans for franchise financing

SBA offers a few loan options for financing your franchise. Depending on the amount of money you need to purchase your franchise, you will choose from a General Small Business Loan or a Microloan. These loan programs are set up for the particular purpose of starting a business or helping an existing business grow, with limits from $50K to $350K. If you are a veteran, the SBA’s Office of Veteran’s Business Development offers special financing programs to help you get your business off the ground. In addition to funding, the OVBD could also help you procure government contracts for your business. If a traditional lender finds that your loan is too high-risk to fund, the SBA offers loan guarantees to banks of up to 90% of your loan amount. You would submit your loan to the bank, and the bank will submit it to the SBA for approval. Once approved, the bank will fund your loan on the SBA’s guarantee.

Alternative funding sources for financing your franchise

Not everyone has a spotless financial history. Even a few blemishes can deter lenders from offering financing for your new franchise. If the traditional loan or SBA loan options are not right for your circumstances, there are other ways to obtain funding.

Loans from friends or family

Asking for loans from friends or family might better suit your needs, especially if you require a lower amount of money to subsidize your start-up capital. Parents are offering to give inheritances ahead of their passing these days, and what better way to employ a family legacy than by starting your own business? If your friends or family financing will be a loan rather than a gift, be sure to use a lawful loan contract for everyone’s protection.

Crowdfunding

Here in the 21^st century, we have seen a new type of business financing emerge – crowdfunding. It might seem a bit out of the norm, but rest assured, many new start-ups have counted on crowdfunding for their initial business costs. You can either choose to set up a personal fundraising page to raise money to finance your franchise or apply for assistance through specially-funded crowd source projects. Search the Internet for special crowdfunding sources, which are set up for specifically to help launch new businesses, or even businesses within specific industries. You might be surprised at what is out there for the taking!

Also read: What is the best low-cost franchise opportunity?

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