Does the franchise you're considering offer franchisor financing? These programs are a popular way to cover the startup costs of a franchise unit. But before diving in, take some time to learn about these programs and whether they're the right option for you.
What is franchisor financing?
To start, franchisor financing is a program that helps new owners defer some of the costs of startup.
This form of financing is usually offered in one of two ways:
- The franchise might offer a loan to cover part of the costs of acquisition or to build liquidity reserves.
- A franchise representative could connect a prospective owner with a third-party lending partner that can supply some of the capital that’s needed to start and begin running a franchise unit.
Both forms of franchisor financing typically mirror traditional term loans. Owners agree to repay what they borrow, with interest, over a fixed period of time. In some cases, franchisors offer alternate arrangements. These could include interest-only loans or loans with a balloon payment that’s due months or years after the franchise begins operations.
Franchisors can provide other forms of financial assistance, too. This assistance might include down payment contributions, waived franchising fees, or reduced royalty or licensing fees. But, keep in mind, these options are often reserved for future owners interested in starting multiple franchise units or starting units in strategically important areas.
Will a franchisor cover the entire cost of startup?
Franchisors rarely cover the full cost of startup. Most require owners to put a moderate amount of cash down on the business, which usually falls in the range of 25 to 85 percent of the full costs of startup and operation. But while it's rare for franchisors to loan the full amount you need to begin operations, they may help you work out deals to reduce your upfront expenses. For instance, many will connect you with equipment providers who will loan or lease equipment. Others will set you up with payment plans to help you avoid a huge outlay of cash for equipment costs.
Can I use franchisor financing with other forms of financing?
Yes. Many franchise unit owners combine multiple sources of capital to amass the money they need.
But here's something to know. Most franchisors have firm requirements about the amount of non-borrowed cash an owner must have on hand to start a franchise unit. Be sure to speak with a representative from any franchise you consider to learn about the business’s cash requirements.
Are the terms favorable?
The terms vary by franchisor or franchise lending partner, but often, they’re in line with bank products. Of course, you should certainly compare the rates and terms of your franchisor’s financing program with those of a conventional lender's term loans before choosing this option.
Do I need to have good credit?
In most cases, yes. Franchisors and lending partners can deny you a loan or refuse financial accommodations for applicants with less-than-perfect credit. They can also ask for a larger down payment or a higher interest rate than they might from people with higher credit ratings.
How do I apply for franchisor financing?
Your franchisor will guide you through the steps you need to take to attain this form of financing. Most will check your credit. They'll also request copies of your bank statements, tax returns, and other documents to assess your current financial standing before offering funds.
Before agreeing to any franchisor financing terms, be sure to share the loan documents with your attorney. Together, you should study the loan requirements, the recourses for missed loan payments, and the outcomes that can result from defaulting on the loan.
Need help finding an attorney? Consider working with Contract Counsel. Check out their website here.
Which other forms of financing should I consider?
Here are some other financing options to consider:
- Term loans
- SBA loans
- Asset-backed financing
- Retirement account loans, distributions, and rollover as business startups (ROBS)
- Partnerships
You can learn more about these options here:
What’s next?
Once you’ve determined how to cover the costs of starting and operating a franchise, you can move on to other tasks that will set you up for success. We can guide you through site selection, training expectations, preparations for opening day, and more. Log into your owner’s portal to get started.
