Getting enough funding for your franchise is critical if you want a fighting chance at success. If you fail to raise enough capital you could run out of cash before you can make a profit or you may miss opportunities for growth because you don’t have enough cash to expand. This is why franchisees should strategize about funding whether they’re a start-up or an established business.
If you’re a new franchisee opening your first location, don’t overlook the importance of covering all your basics for at least the first six to twelve months. You need to cover at least your essential fixed and ongoing costs such as:
- Employee salaries (including your own)
- Royalty and advertising fees
Essential costs are expenses that are absolutely critical for your business to run. It’s important that you do not include non-essential costs on this list. Non-essential purchases can be delayed until after your franchise begins to make a profit.
The costs for funding your startup franchise will vary depending on the type of franchise you’re running. Take a look at your documentation for your franchise to get startup cost estimates then make a plan for raising or self-funding the seed money you need to get started.
As with any business, franchisees have access to the typical funding sources such as bank loans and credit cards but they also have access to franchise-specific funding sources. Let’s take a look at funding sources franchisees should consider:
Traditional Bank Loans
Every business has access to traditional bank loans if they qualify. And while it’s true that going to a bank for a loan means you will need to meet their high standards, the Small Business Administration (SBA) reported that franchises were 15% more likely to receive a bank loan than other types of businesses. Many banks are more open to funding franchises that are connected to a brand with a long track record of success. In their eyes, franchises are less risky.
Some franchisors will help fund you by discounting their franchise fees or partnering with you to get a loan.
You can apply for a small business loan through the SBA. The SBA has a franchise registry with hundreds of vetted businesses. And if your franchise is on the registry, it may be easier for you to get an SBA loan.
Franchise Specific Lenders
There are lenders who specifically lend to franchisees. Consider investigating this option and comparing the rates and terms to find the best match for your situation.
There are thousands of business owners out there looking for opportunities to invest in businesses. If can prove that your business plan is viable, they may be interested in investing in your business.
If your startup funding needs are small, credit cards may be a viable funding option. Just beware of the interest rates. Credit card interest rates are much higher than interest rates on a typical bank loan.
Friends and Family
This may be one of the easiest ways to fund your business in the beginning especially if your friends and family trust your business sense.
Potential franchisees can use their 401k to invest in themselves. This is a commonly used path to business ownership. The details are complicated and best left to companies specializing in this type of arrangement. The fees are reasonable and the process is straightforward as long as you are using a specialist.
You don’t have to always look to external sources for funding your startup, dipping into your savings is a legitimate funding strategy that has been successfully used by many business owners in the past.
A few notes of caution:
- Establish boundaries. If you’re borrowing money from your friends and family, use written agreements with clear boundaries around what the ‘investors” can expect from you. In the case of a family or friend loan, be clear about when repayment is due and what risk, if any, the investors are taking.
- Don’t risk your financial solvency. When you’re self-funding, make sure that you’re not recklessly jeopardizing your life basics such as housing. If you’re taking out a loan against your home, have a plan for what will happen if you’re unable to pay it back in the time you agreed.
- Read the fine print. When you’re desperately trying to fund your franchise, it can be tempting to take any offer on the table from banks and investors. However, you could be jumping out of the frying pan into the fire if you don’t understand the terms you’re agreeing to. Work with an advisor who understands franchise financing and contracts to ensure that your investor and loan agreements are fair and reasonable.
If your franchise has been running for a year or more and you need funding for new equipment, expansion, or other opportunities, it may be easier to find funding. Traditional lenders may be more likely to fund your franchise if you have an established track record of financial performance and a good credit history. But even if you qualify for a traditional bank loan, you should also take a look at franchise-specific funding as they may offer competitive rates.
What Funders Look For
Whether you’re applying for a traditional loan or looking for investors, there are certain qualities that funders are searching for.
- Industry experience. When you’re asking for funding, lenders and investors want to know that you understand your industry and have a track record of success. The more experience you have, the better.
- Financial performance. If you can prove that your franchise brand has a track record of financial performance, getting funding may be easier even for a new startup. If you’re an established franchise, proving that you have been profitable can open many funding doors.
- Effective business plan. One of the benefits of being a franchisee is that you have access to a business plan that has been proven effective. This effective business plan will count heavily in your favor as you seek funding.
- Market share. Funders will want proof that you have enough of the market share to be profitable and expand.
- A clear financial benefit. If you’re looking for investors, they will want to see clearly how they will profit and how quickly. Work with a franchise expert to make sure that your investor agreements work for all parties involved.
Even if you’re not currently looking for funding, knowing your funding options and being prepared to seize funding opportunities is critical for your business success.