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Editor's Note: March '24

The Importance of Financing in a Franchise Business

Financing is a key factor in the success of a new franchise. Here franchise experts share their 3 most important rules to follow when considering franchise financing. Buying into a franchise requires a solid net worth, significant up-front financial investment and enough cash flow to get the business through the start-up phase.

Before searching out any financing for a new franchise, it is vital to be well planned and prepared. “Having a breakdown of your net worth, a printout of your credit history and an in-depth business plan are probably the best ways to prepare,” says Derek Cafferata. “Don’t venture into sourcing franchise financing until you have these three things.” A business plan needs to be well thought-out, clear and accurate. It requires information about the franchise you plan to purchase, pro forma financial statements, projections, working capital estimates and a marketing plan.

Understand the costs, many potential franchisees fail to factor in the additional costs of purchasing a franchise business. “Working capital for the first few months of a new franchise is what many people tend to overlook,” says Derek. “Without enough working capital, establishing a new business can be a very difficult and stressful time. “In general, the costs of purchasing a franchise include the initial franchise fee, start-up costs, ongoing royalty fees, franchise advertising fees, legal fees and insurances. The franchise fee is a one-off fee usually tens of thousands to hundreds of thousands of dollars depending on the franchise you purchase. The start-up costs can vary significantly and include equipment, shop fit-out and product costs. Franchise royalty fees are usually paid monthly to the franchiser and range between two and 10 percent on average.

Lastly shop around, potential franchisees have a number of options when looking for financing a franchise business. The most common place people look to first is the franchiser. Franchiser financing is offered by many franchise companies to varying degrees. Some offer entire loan amounts, while others offer partial loan amounts, generally between 15 and 75 percent of the total loan. Another option many choose for financing a franchise is a small business loan. This may be through a local lender who you may already have a business relationship with, an SBA (Small Business Administration) loan, or a specialist lender. A number of companies exist to help those looking for a small business loan, such as Lendedu. They specializes in financing for a wide range of situations, including small business loans specifically for franchise financing. Other financing options include support from family and friends, savings, borrowing on a house mortgage, bank loans and independent finance companies.

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