Opening a Franchise? 3 Common Financing Fears and How to Face Them

In many cases, a tried-and-true business model with built-in brand recognition can make it easier for your franchise to qualify for a loan. Especially if you’ve been in business for a few years or you already own a few franchises.

But finding a loan for this unique business model can pose some challenges, especially when you’re starting out or want to expand. Here are three common franchise funding fears and what you can do about them.

Fear #1: You won’t qualify for enough startup funding.

The cost of opening a franchise can run anywhere from less than $10,000 to upwards of $300,000, depending on your level of experience. If it’s your first time, chances are those costs will be on the higher end — and you might have a harder time qualifying for funding.

Solution #1: Ask about in-house financing

Franchises sometimes offer funding programs to new business owners — though it’s not the norm. If that’s the case, you have a built-in source of funding to start off your new business.

But even if your franchise does offer funding, you might still want to consider other options available to you, which might come with more favorable terms or rates.

Solution #2: Consider franchise and startup lenders

Look into lenders that specialize in franchise financing — they often offer funding to get your new unit up and running. Lenders that work with startups could also help you get some or all of the funding you need, even if you haven’t opened your doors.

Since you’re working with an already-proven business model, you might have an easier time getting a competitive rate and term than non-franchise startups. But these types of lenders tend to rely heavily on your personal credit and business experience, meaning it might not be the best option if you’re new to the game.

Solution #3: Take out a personal loan

Have good credit and only need $50,000 or less? Comparing the best personal loans available to you might help you find an even more competitive rate. That’s because personal loans tend to have lower rates than business loans.

But you need to have a steady source of income to qualify and could have trouble getting approved if you’re self-employed.

Solution #4: Roll over your retirement fund

If you have more than $50,000 in a retirement plan like a 401(k) or IRA, you can often roll over that money to finance a new business. This is known as a Rollover for Business Startups (ROBS).

The process is a bit complicated, so many entrepreneurs opt to hire a company to help them set it up and maintain the new retirement account. It can set you back around $4,000 up front, but could ultimately cost less than a loan.

Fear #2: You won’t get funding for a second unit.

So you want to open up another franchise — maybe it’s in your contract or maybe you just want to expand. Finding funding for your second unit can be the most difficult, since lenders now have a business under the same management and model that they can scrutinize.

Solution #1: Wait until you’re ready to apply for a bank loan

The best thing you can do is wait. Even if your franchise unit is doing great during its first six months, banks will generally offer more favorable rates and terms to businesses that have been around for at least three years. In fact, some might not work with you at all before that time.

If you have the time, wait until you’re fully comfortable running your first franchise unit before you expand. When you’re ready, you’ll have a better chance of qualifying for lower rates and more competitive terms — and you’ll be better prepared to make your second location a success.

Solution #2: Save any personal funds you have for opening your second unit

Sometimes waiting around isn’t an option — especially if opening a second location in the first few years is in your contract with the franchisor. In that case, borrow funds to open your first location and save any personal funds you have for opening your second unit.

Not only will this help fund your new unit, but it can also make it easier for you to qualify for financing down the line. Lenders prefer working with business owners that have some skin in the game.

Fear #3: You won’t be able to get emergency financing fast enough.

As a franchise owner, you often have an easier time getting a bank or Small Business Administration (SBA) loan than some other small businesses. But bank loans can take as long as two weeks to fund — or longer if you’re getting money from the SBA. That won’t cut it when you have an emergency expense like broken equipment or a particularly slow season.

Solution #1: Get an online term loan

Online business lenders might be your best bet when you need funding fast. Some can get you money as soon as the next business day.

But do your research to ensure you’re getting a good deal. Online lenders typically charge higher rates than banks — in some cases running anywhere from 30% to 80% APR.

Solution #2: Go with a merchant cash advance

If your business can’t qualify for a term loan, a merchant cash advance (MCA) might be your next best option. MCA companies offer advances on your business’s future sales, which you repay with a percentage of your daily revenue plus a fixed fee. And you can often get funding as soon as the next business day.

You don’t need to have credit or be in business for very long to qualify for this type of financing. But it comes with a steep price. Often fees translate into APRs over 100% — sometimes even topping 300%. Save it for an absolute emergency and carefully weigh the drawbacks before you sign up.

Bottom line

Franchises have a lot of advantages over other types of businesses, especially when it comes to financing. Take advantage of low-cost bank and SBA loans whenever possible. But if you’re just starting out, want to open a second location or have an emergency cost, you might need to look into some alternatives like online business loans.

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