A franchise offers double benefits - it offers the flexibility and independence of a small-scale set-up along with the infrastructure of a bigger corporation. It is an ideal opportunity for those interested in entrepreneurship, especially first-time entrepreneurs.
Opening a franchise comes with its challenges and requires substantial capital investment. As a first, one has to be prepared to pay out a big franchise fee plus royalties and advertising costs, as applicable. Not many can easily arrange this kind of cash. Sourcing a business loan for funding franchise investment is one option in such cases.
Here are six of the best ways to finance your franchise store easily and conveniently.
If you need funding for your franchise, you can directly reach out to your prospective franchisor for the same. A lot of corporations that have franchise-style business models provide tailored financing options which are designed for their specific business. It could come through partnerships with select lenders or capital is directly offered by the corporation. This is a common way of financing a franchise and provides many benefits.
One main advantage of seeking finance from the franchisor is that it offers one-stop-shop solutions in most cases. Some of these programs provide financing for franchise fees and also for purchasing equipment or other infrastructure to start up the business.
While working with a franchisor for any financing program, you may not need to hunt for further funding. Most franchisors know their business in and out and the associated risks, hence they become the most suited options for financing.
Commercial Bank Loans
Another preferred way of financing a franchise is to opt for a term loan from a bank or financial institution. Under the term loan model, a bank offers a lump sum amount which can be repaid along with interest, in equal monthly instalments for the pre-decided period.
While purchasing a franchise and applying for a commercial bank loan, the lender may want to go through your business plan along with your personal credit history. The lender uses documents gathered in this process to assess your credibility. Banks try to determine if you can afford the loan and gauge your repayment capability.
Apart from banks, franchisees can seek loans or funds from a group of lenders. These can be angel investors who are often business people running successful businesses. They look to invest their funds in rewarding business opportunities. Franchisors can also reach out to venture capitalists, who offer a chance to investors to participate in a fund which is used to buy stocks of a private company. Private equity is another option for franchise funding and it means shares or stocks of a company which is mostly privately held.
It is important to have a well-crafted plan for lenders. This will help in justifying the investment needs of your business. The repayment timeline and interest is also to be agreed upon.
For quick funding requirements of a franchise and also to secure additional capital needs, you can consider opting for franchise lending from an alternative lender.
Alternative lenders usually list out fewer requirements and have shorter turnarounds as compared to traditional financers. They provide a variety of loans such as equipment financing, term loans, and even business lines of credit. While there are many positives, this financing and the convenience it offers may cost you more than normal.
Alternative loans are usually more expensive, come with shorter repayment timelines and lesser loan amounts as compared to traditional counterparts. These may still be worth it for supplementing the existing financing or if you don’t qualify for a bank loan and need urgent cash.
If you are unable to get franchise financing from a bank or alternative sources, you may have to begin thinking creatively for ways to finance. One of the latest modes of financing a franchise is opting for crowdfunding. You can either set up and begin promoting a personal crowdfunding page or hunt for specific organizations which can help in crowdfunding for businesses or franchises. Many websites offer to crowdfund for select industries and business categories, which can be used to meet financing needs.
Loans from Close Groups
One of the ways to finance a franchise is to borrow from friends and family. This is also a very popular medium to raise finance. Whether you borrow money upfront, take it as a gift, or ask a friend or family member to join your business as a partner, these loans come at a very reasonable price. While this is true in most cases, some do come with a risk to friendships and relations in general.
For taking a loan from a friend or family, you can design and write-up a contract which includes terms such as repayment and sets the expectations for both parties. If everyone involved understands the agreement thoroughly, disagreements and other issues may not pop up later.
Major Expenditures Incurred by Franchisees
Here are some of the top spends that a franchise has to be prepared to fund in the initial stages:
Office supplies and basic equipment
Industry-specific machinery or equipment
Infrastructure improvements and construction
Interiors and décor
Recruitment and staff training
Becoming a franchise owner is a dream for many entrepreneurs. Some venture into it by doing thorough homework but a lot of them are unable to generate funding for the venture at the right time. With multiple financing options available to entrepreneurs, all it takes is a bit of preparation and the push to get it done. The right source has to be shortlisted based on specific business requirements. Such funding can go a long way in ensuring that the business remains smooth-sailing and stands the test of time or competition.