4 Sources of Franchise Financing

Franchise financing can be obtained from a variety of lending sources, depending on your credit history and the amount you need to borrow to buy your new business. You will need to analyze each available option to see which method is best for you. Consulting with a tax professional is a good idea, to make certain you structure your franchise financing in the most profitable way.

1. Your Assets

If you have available assets that you can use as collateral for a loan, this may be the best way to finance your new business. You can contact your bank to see the type of loans they have available for the collateral you can pledge. For example, if you have a plot of land you own free and clear and you want to use it to secure a loan, find out what percentage the lender will give you relative to what the lot is worth.

Before you agree to put up collateral, make sure that you will not need it in the near future since it will not be released from securing the loan until you have made a significant reduction in the balance.

2. Franchise Lending Source

Many franchises are willing to finance your venture themselves, or they can recommend a lending source they know is reliable. Ask your franchiser which option their other franchisees use the most. For example, if they inform you that nearly all new franchisees use a certain lender, consider contacting the lender to discuss the terms of financing.

3. Friends and Family

Asking your friends or family to help you finance your new business may not be that appealing to you, but if it is viable, you should at least consider discussing the terms of a loan before you dismiss the idea altogether.

You probably do not know all of the financial goals of your friends or family members. Several may have always wanted to own their own business, and this gives them an opportunity to achieve their goal by backing you in a new venture. You can have a clause included in your loan agreement that allows you to buy them out after the loan is paid off. Whether you make them an equal partner in your franchise is up to you.

4. Other Lenders

You can check online as well as in your town for banks that specialize in franchise financing. Since you are buying a franchise, the business is already established and not a start-up company you are trying to build from scratch. You should be able to find several sources that have favorable loan terms.

You can also contact the Small Business Administration, or SBA, to inquire what the latest programs are that they have available. The SBA will not make you the loan, but if you qualify, they will guarantee a large portion of it, which provides an incentive to the lender that actually makes you the loan since their risk exposure will be reduced by the guaranteed amount.