The US has more than 750,000 franchise establishments and 7.49 million US employees work in franchise businesses. The economic output of the US franchise industry is valued at $670 billion. Further, 10.5 percent of all businesses in the US are franchises.
Franchising has become an increasingly popular way to start a business, but it can be challenging to find the right funding for your venture. A franchise allows a person to start a business that already has an existing business model, along with a recognizable brand name. This translates to a significant benefit to a new business owner who bears a lower risk threshold when compared with starting a new business from ground zero. Franchisors also provide a continuous support system, such as marketing, training, and product development. These added benefits can fast track revenue growth, and ultimately profitability.
With all these benefits, of course, there’s a price. Franchisees must pay a franchise fee and royalties. Securing the necessary capital is essential to getting your franchise up and running. Fortunately, several funding sources are available for those looking to finance their franchised business.
Traditional bank loans
Banks typically require an extensive loan application process, and the terms can vary significantly depending on the lender. You’ll need to provide detailed business plans, personal financial information, and other documents to qualify for a loan. It’s important to understand the terms of your loan before signing any agreements. Make sure that you can afford to pay back the loan on time.
Pros
- Additional services offered
- Lower interest rate
Cons
- Higher qualification standards and required documentation
- Collateral required
Government grants
These often come in the form of tax credits or direct grants from the government. The eligibility requirements vary depending on the type of grant and the specific business, but most grants are available to all types of businesses. It’s important to research your options thoroughly before applying for any grants and make sure you understand the process.
Pros
- High credibility
- Low interest rate
Cons
- Higher requirements to secure funding
- Limited funding amounts and options
Crowdfunding
Crowdfunding involves raising money from a large number of people via online platforms. Different types of crowdfunding include rewards-based crowdfunding where backers receive a product or service in exchange for their investment, or equity-based crowdfunding where investors receive equity in the business. Platforms like Kickstarter, Indiegogo, and GoFundMe allow entrepreneurs to raise money from a wide network of investors. This can be a great way to get the capital you need to start your franchise, but it’s important to understand the terms of any crowdfunding campaign before launching one.
Pros
- High exposure to potential investors
- Fast funding process
Cons
- Fees from platforms
- Well-crafted pitch required, and sometimes a business plan
Alternative lenders
Alternative lenders are another option for those looking to finance their franchises. They’re non-bank financial institutions and are an option for those who aren’t qualified for the traditional loans. These lenders are more willing to take higher risk borrowers and they typically have less stringent requirements than traditional banks, but the interest rates and repayment terms can be significantly higher. Be sure to research any potential lender thoroughly before signing an agreement and make sure you understand the terms of the loan before taking it out. If you’re interested in using an alternative lender for funding, you need to find a reputable lender with a proven track record of success.
Pros
- Flexible terms
- Fast application process and approval
- Fast funding
Cons
- High interest rate
- Large hidden fees
- Low credibility
- Collateral required
Private investment
Private investment involves finding an individual or group of investors who are willing to provide the capital you need. These individuals may have a direct interest in your business and be more likely to offer flexible terms, but it’s important to understand their expectations before taking any investment.
Private investment scenarios can include:
- Angel investors: High net worth individuals willing to provide capital in exchange for ownership equity or convertible debt.
- Personal savings: Using personal funds to finance the franchise.
- Friends and family: Borrowing money from friends or family members.
Pros
- Flexible terms
- Timely funding
- Enhanced business network and assistance
Cons
- Low credibility
- May have to give up equity in your business
Lenders will look at your credit score when determining whether you qualify for financing. A good credit score increases your chances of getting approved. Bank account history also will play into their decision.
How to choose the best loan option for your needs
Choosing the right loan option requires careful consideration of your needs as well as an understanding of each type of financing available. Here are some steps you can take:
- Determine your startup costs: Before applying for any type of financing, know how much money you’ll need to start your franchise. Research the franchise upfront costs, build-out, and ongoing costs of operations.
- Research different types of financing: Once you know how much money you need, research the different types of financings available to you, and compare their pros and cons.
- Check eligibility requirements: Make sure you meet the eligibility requirements for each type of financing before applying.
To successfully secure funding for your franchise you will need a great business plan that establishes a clear vision for your business. Additionally, have a well-thought-out pitch. The more prepared you are the easier securing financing will be.
Dr. Vincent DeFilippo, DBA, MBA, is a professor in the School of Accounting and Business at Monroe College. Before that he was CEO of a private equity fund in Hong Kong, raising several billion dollars in venture capital for entrepreneurs and publicly traded companies throughout the Asia Pacific Region. His new book Braking Point: How Escalation of Commitment Is Destroying the World (and How You Can Save Yourself), (ViennaRose Publishing, May 3, 2023), is a Wall Street Journal #2 bestseller. Learn more at vincentdefilippo.com.
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