The Quickstart Guide to Financing Your Franchise
So you want to buy a franchise – congrats! Franchising is a great way to own a business with a proven track record of success. Of course, a franchise comes with its share of fees, including royalty fees, inventory and working capital. If you don’t have the cash to plunk down to get started right away, you’ll want to investigate your franchise financing options.
This quickstart guide will help you begin.
Get Your Financial Ducks in a Row
Before you get too deep into the dream of owning a franchise, make sure your finances are in order. Check your credit report to ensure that there aren’t any black marks that might make a lender think twice.
Also, gather pertinent paperwork. Once you’re ready to apply for a franchise loan, you’ll need a personal financial statement, copies of your tax returns for the past three years, and verification of the source of your down payment.
You’ll also want to have a solid business plan in place.
Also, keep in mind that you may be asked to provide a down payment, collateral or both, so be ready to make an investment.
Start with the Franchise Itself
Opening a franchise is quite different than starting your own business from scratch. Franchisors will often ask you to prove that you have the experience and capital to be an asset to the franchise. But if you do meet the requirements they may have, they may actually provide guidance in helping you get on board, including recommending you to lenders or funding programs via third-party lenders. This may include waiving all or part of the franchising fee. Keep in mind that a franchisor’s interest rate may be higher than a typical bank’s. Still, it could pay to check with your franchisor first!
Turn to a Traditional Loan Source
According to the Wall Street Journal, many franchises are funded by a traditional bank loan.
While the process of applying for a loan to fund a franchise is similar to the process for applying for a traditional small business bank loan, you should note that your bank will also want information about the franchise you intend to buy. It’s generally easier to get a loan for a franchise with a solid track record of success and many locations.
Keep in mind that it’s also easier to get a traditional bank loan if you have a relationship with a bank or a track record of success in other business ventures.
Should you fail to secure a traditional bank loan, you may be eligible for a government-backed Small Business Administration loan.
Alternative Methods of Funding
Franchisors and bank loans aren’t the only way to fund a franchise. Consider alternative sources of funding, such as saving aggressively, asking friends and family, an alternative business loan or even establishing a relationship with an angel investor. Again, unless you fund the franchise yourself, you’ll want to have your business plan and your financial documentation in order before going this route. Even friends and family want to make sure they’re making a sound investment!
Do you have questions about funding the franchise of your dreams?
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