Franchise ownership can be a great way to get started in business. When you purchase a franchise, you’re often buying into an established system that has a track record of success. That can make it easier to get business financing to buy a franchise.
Historically, banks and other lenders have been more likely to finance franchises than brand new business ideas. Why?
- The lender can examine past financial performance of other franchise locations to get an idea of how successful your franchise could be. The Franchise Disclosure Document (FDD), which is required of all franchisors, provides information about the number of franchises, their success and failure rate, and what percentage have repaid Small Business Administration (SBA)-guaranteed loans.
- Franchising is a growth industry. According to the International Franchise Association, 2016 was the sixth year in a row in which franchising’s growth was expected to outpace that of the U.S. economy as a whole.
- Lenders know that as a franchisee, you have the backing of a franchisor behind you. That backing typically includes training, access to ongoing support, marketing and advertising materials and more.
How to Finance Your New Franchise
To finance your franchise, check to see if your franchisor has an internal financing program. These programs can include a guarantee for third-party loans.
Other franchisors may refer you to banks with which they have relationships. These banks can be more likely to finance the company’s franchisees because they’re familiar with the franchisor’s history, business model, and the risk factors involved.
If your franchisor doesn’t provide financing or refer you to lenders, the SBA loan program may be the right fit. The SBA does not directly make loans, but guarantees a percentage of loans made by participating lenders to small businesses. To see if the franchise you’re considering is eligible for you to obtain an SBA-guaranteed loan, check out the SBA Franchise Registry. Although you aren’t guaranteed to get a loan if you’re buying one of those franchises; it does mean that the SBA has determined the company is a legitimate franchisor.
Whatever source of financing you approach for a franchise loan, the lender will most likely require documentation, including:
- A business plan for the franchise
- Franchise agreement and any other agreements with third parties related to the franchise
- Commercial leases
- One to three years’ worth of financial projections
What About Experience?
In addition, lenders will look to see if you have some background and experience in the industry in which you’re buying a franchise. If you’ve spent 15 years as an accountant and now want to start an auto mechanic franchise, you may be less likely to find financing than someone who has spent 15 years as an auto mechanic. If you don’t have the relevant experience, be prepared to demonstrate that you have people on your management team who do.
If you are interested in learning more about franchising, read about the pros and cons of starting a franchise business.