5 Options To Finance Your Franchise Purchase

The Different Types of Loans Available to Franchisees

Starting a franchise takes so much more than just hard work. It requires tens of thousands of dollars in startup costs that will go towards getting the business up and running. If you don’t have the cash to fund your endeavour, financing options are available. While applying for a business loan is the most common route, it’s important to understand that there is more than just one way to go about funding your franchise.

In this article, we will go over the different options for financing the purchase of a franchise business and offer tips for getting approved for a franchise loan.

What Are Franchise Startup Costs?

As a franchisee, the amount you’ll need to pay in startup costs is dependent on many different factors, like the type of franchise you are starting, whether you plan to buy or lease your retail space, and the franchise system in place. With that being said, below are some examples of the most common startup costs associated with starting a franchise:

A Franchise Fee

This is an upfront fee that must be paid to the franchisor in exchange for them granting you the rights to use their franchise system, name, branding, and trademarks. Franchise fees can range from just a few thousand dollars to over a million dollars, depending on the franchise.

Inventory and Supplies

Depending on the franchise, franchisees may need to purchase their own inventory and supplies to get the business up and running. This can include products, equipment, and uniforms.

Legal and Consulting Fees

It’s crucial that as a first-time franchisee, you work with an experienced franchise consultant and franchise lawyer that can help guide you through the process of starting your business and review and negotiate your franchise agreement.

Working Capital

Franchisees should always have cash reserves or working capital that can be used to cover operating expenses until the business becomes profitable.

5 Ways to Finance Your Franchise

When starting a franchise, if you don’t have the cash flow to cover all of your startup costs, this is typically not an issue. There are so many ways to obtain financing to help cover these costs that we will explain below.

1. Apply For a Bank Loan

Whether it’s a line of credit or a term loan, many banks will offer business loans specifically for franchise operators. This is the most common way to finance a franchise business, as banks are often more willing to lend to franchisees compared to other types of business owners.

2. Obtain Financing From the Franchisor

Many franchisors will float your start-up costs in exchange for interest payments on all your sales. However, not all franchisors do this so be sure to ask about financing options early on when evaluating potential franchisors.

3. Have a Business Partner to Put Up Funds

An alternative way to finance your franchise is to find a business partner that is willing to cover half of the startup costs. The downside to this is that you will share ownership of your franchise and have to share the profits.

4. Tap Into Your Home Equity

If you are unwilling or unable to obtain a business loan, another option is to secure a home equity loan or line of credit. With this type of loan or line of credit, you will be borrowing money against the equity they have built up in your home.

5. Work With Alternative Business Lenders

If you have a poor credit score and obtaining a traditional business loan from a bank is not an option, there are alternative lenders with less stringent lending requirements.

It is often easier to obtain financing from an alternative lender; however, keep in mind that interest rates for these types of loans tend to be much higher than traditional loans from a financial institution.

Tips For Securing a Business Loan

If you plan on applying for a business loan with a bank or financial institution, consider these tips to help improve your chances of being approved for financing.

Work With Lenders That Specialize in Franchise Loans

When deciding how you want to finance your business, do lots of research and look for institutions that specialize in business loans for franchisees. Such lenders understand the unique requirements and risks involved in financing franchises and will be more likely to approve your financing.

Have a Solid Business Plan

When applying for a business loan, banks will typically ask you to present your business plan. The business plan should clearly outline your franchise concept, target market, financial projections, and other important details.

Make Sure You Have Enough For a Down Payment

Many lenders require you to put down 10% to 20% of the loan amount as a down payment. Make sure that you have the full amount saved up and set aside before you begin applying for loans.

Be Prepared to Provide Collateral

Most lenders will require collateral in exchange for a loan. This typically includes personal assets such as your:

Home
Car
Investments
Business assets like equipment or inventory

Make sure that you have the appropriate assets to use as collateral before applying for loans.

Get Your Credit Score in Top Shape

Having a strong credit score will significantly improve your chances of securing a loan with a reasonable interest rate. For this reason, find out where your credit score stands and take action to improve it if it’s lower than 600.

Work With a Financial Advisor

Sit down with a financial advisor to go over some numbers and learn more about the different financing options available to you as a franchisee and their respective pros and cons. A financial advisor can also help you prepare for and navigate the loan process while improving your chances of being approved for financing.

Looking to Start Your Own Franchise? Consider Working With Gorilla Bins

Gorilla Bins is Ontario’s leading waste management business and is one of the fastest-growing franchises in Ontario. Founded in 2014, Gorilla Bins has achieved a sales growth rate of 328% over the past five years and built a track record for helping build many successful franchises across the province.

We also provide all of our franchisees with extensive training, coaching, support, and even marketing to help ensure they are successful long-term.

Contact our team today to learn more about franchising with Gorilla Bins and how we can help set your franchise up for success.