How to Finance a Franchise Purchase

Establishing a franchise business gives you the advantage of working for yourself and at the same time, having access to the resources and know-how of the franchisor. Plan well and work hard and you will have the satisfaction of seeing your operations grow over a period of time. But starting off as a franchisee requires a large sum of money. You need to make the initial payment to the franchisor, budget for royalty fees and arrange to have an adequate financial cushion to take care of working capital requirements. There are a number of sources that you can tap for funds. But before doing that, it is advisable to do some preparatory work. Keep these ready Business plan – It is a good idea to get professional help to prepare this document. After all, any lender that you approach would like to get a very good idea about how you plan to use the money you borrow and the revenue streams that you will generate to pay it back. Your business plan should describe the product or service that you plan to sell and your target market. You should be capable of explaining all the details that are included, especially the financial data. Credit score – A high credit score will definitely help. But don’t worry too much if you do not meet this criterion as long as you are able to provide a satisfactory explanation regarding your score. Proof of equity – No lender will extend 100% of the finance that you need. It is essential that you are able to demonstrate that you can make a contribution of 25% or more of the total funds required. Sources of finance Banks and credit unions – Approaching a traditional source like a bank or a credit union is usually the most economical option. While your proposal may take some time to process, you can be sure that the rate of interest on your loan will be among the lowest when compared to other sources. Keep in mind that the franchisor you have selected will play an important role in helping the bank decide whether to extend finance. If the franchisor is a well-established company with a popular brand and its franchisees are financially successful, the probability of your proposal getting approved is higher.SBA loans – If the bank that you have applied to hesitates in extending finance, a Small Business Administration (SBA) loan may be a good alternative. The SBA is a government institution that does not make loans itself but does guarantee those made by other lenders. If you meet the SBA’s criteria, the bank would get a guarantee of 75% of the loan amount. Those entrepreneurs planning to set up their first franchise would find an SBA loan to be a good option. Franchisor – This can be the most convenient option. If you meet the franchisor’s eligibility criteria you have a good chance of getting funds from their finance arm. They may even help arrange money through a lender with whom they have a tie-up. Very often, the franchisor would also have made arrangements with a leasing company so that you can get the equipment that you need without having to block a large amount of money. Other Sources Many prospective franchisees also approach friends and family for the money that they require for starting operations. If you have a sizeable amount in your 401 (k) or IRA account, you can consider accessing these amounts subject to the restrictions that government rules impose. But before borrowing to start franchise operations, remember that there is a business risk involved. According to a Service Employees International Union report, 17% of franchise loans made through the SBA from 1991 to 2010 ended in failure.

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