When buying a franchise, the key number you will need to know for franchise financing purposes is the initial investment. The initial investment is your “all in” costs and includes the franchise fee and various startup costs such as grand opening, initial inventory, signage, leasehold improvements, supplies, equipment and more.
The initial investment for most franchises is between $75,000 to $500,000 — with about half falling under $250,000. However, the initial investment varies widely by industry and brand, with some franchises at less than $75,000 and others approaching $1 million or more.
But don’t shy away because of these numbers. Buying a franchise is very doable. “Many first time franchise buyers can find an abundance of viable franchise options between $100k to $250k,” advises Mariel Miller, a national franchise advisor. “And most of the time, with the right franchise financing strategies, they can come up with several funding combinations to afford it.”
Many buyers put together financing options that include a combination of personal savings, SBA loans, conventional business loan products, 401(k) rollovers, and/or franchisor in-house programs.
In this guide we help you identify existing assets you may have available. We’ll also identify lenders for the best sources of franchise financing.
Assess Your Situation
To figure out your franchise financing needs, first assess your existing situation.
Franchisors and lenders expect prospective franchisees to have some personal funds to put toward the initial investment. Candidates usually need 10% to 30% cash, provided they are open to considering the many popular funding strategies available today, says Miller.
Franchisors may impose two requirements:
- Net worth. Franchise brands want to know you can afford the franchise. They specify a minimum net worth of assets over and above debts. (Calculate your net worth.)
- Liquid assets. Some franchisors require a cash equivalent — such as $35,000 — in savings. This is money you can get at quickly to cover unanticipated startup expenses, pay for living expenses until the business turns a profit, and/or apply toward the franchise fee.
“We recommend and assist clients in conducting a cost-of-capital analysis as well as a general fundability or prequalification discussion with a franchise finance expert early on in the process. Based on my experience, it’s rare that we cannot find a solid funding strategy that works,” says franchise advisor Mariel Miller.
Personal Assets for Franchise Financing
Always get your spouse’s agreement to use personal assets. Retain a portion for family expenditures such as children’s education and emergencies.
Here are assets commonly used for franchise financing:
Savings and Investment Portfolios
Your personal savings includes bank accounts and investments in brokerage accounts.
Been downsized — or about to be? A severance package can include all kinds of goodies. There may be severance pay, unused vacation and sick pay, deferred compensation, and company stock or stock options to be cashed in.
People with equity in their homes sometimes choose to tap into it through a home equity line of credit. Although popular, this is not usually the best idea. It can limit your future credit availability. And you could be mortgaging away your family’s security.
Aspiring franchisees may want to withdraw from their retirement accounts — IRA, 403(b) or other account. But that’s not always wise. First, you could be risking funds you’ll need in your golden years. Second, you could have to pay a 10% penalty for early withdrawal, along with taxes on the money — seriously eating into the available funds to put toward a franchise.
The IRS rules are complex. Before using retirement funds, get your accountant or a franchise finance expert to estimate taxes and penalties. Avoid unpleasant surprises later.
401(k) Business Financing
If you’re still intent on using retirement funds, an option is a 401(k) rollover, also called Rollovers as Business Startups (ROBS).
The ROBS rollover enables aspiring business owners to tap into their own retirement monies to fund their businesses, without paying taxes or early-withdrawal penalties. The business owner forms a new corporation, and rolls the retirement funds over into a new 401(k) in the new corporation. Then the new 401(k) invests in stock in the business owner’s own corporation.
The original retirement account is treated as a rollover. Therefore, no taxes or early-withdrawal penalties apply — provided all the i’s are dotted and the t’s crossed. ROBS are legal and the IRS says they are not an abusive tax avoidance strategy. But the IRS still calls them “questionable“.
Franchise consultant Joel Libava believes that under the right circumstances, ROBS can be appropriate to finance a franchise. But he emphasizes caution. “ROBS are not for everybody. As long as the IRS says they are legal, and they are set up correctly, I can see their value. However, the scenario needs to be right. A 25-year-old with $12,000 in his IRA — not a good fit. But 50 year-olds with $400,000 in their IRAs? Much more applicable. However, people should never dig into retirement funds too deeply. In other words, they shouldn’t use $375,000 of the $400,000 sitting there.”
Libava warns it’s essential to set up a ROBS — also called 401(k) business financing — correctly. Not following the rules could be costly. “I’ve seen franchisees use 401(k) financing successfully, provided it’s done properly. If you’re going to do one, find a firm experienced in setting up ROBS plans correctly. Understand exactly what you can use the funds for, and what not.”
Any discussion of franchise financing options usually addresses one key issue: how to get a loan for a franchise.
Some lenders that offer financing for franchise business owners make startup loans for new franchisees. Others work exclusively with existing owners already in business.
- For first-time, new franchise owners, the best options are a term loan or an SBA loan.
- For existing franchise business owners who want to expand, refinance or get working capital, the best options include short term loans, medium-term loan, SBA loan, equipment financing, business line of credit, alternative lending, or merchant advance.
To get a business loan, your personal credit score is key. The bare minimum is a credit score of 600. To get an SBA loan most experts agree that you need a score in the range of 640. A credit score of 700 and up will get you the biggest number of financing options and best terms for a bank loan.
Financial institutions typically require personal guarantees for small business loans. They may require collateral and a down payment as high as 20% to 25%.
SBA Loans for Franchisees
SBA loans are made by lenders but backed by the U.S. government and can be used by franchisees. The U.S. Small Business Administration (SBA) establishes all requirements and generally guarantees 75% of the loan. To be eligible to get SBA financing for franchises, the brand must be listed in the SBA’s Franchise Directory.
Small Business Administration financing is available to borrowers who otherwise would not be able to obtain financing. A lender can assess the franchise finance options available to you. Try to find an SBA-preferred lender, which has authority to give direct approval and helps you get through the application process quickly.
The two main types of SBA loans are the 7(a) and 504 programs.
An SBA 7(a) loan is the best SBA option for new franchisees. This loan can also be used by existing franchisees that need working capital, to refinance or for growth. Advantages are:
- A 7(a) loan can be used to open a new franchise business. Conventional lenders are often hesitant to lend to a startup with no track record of sales. But 7(a) loans can be based on future projections.
- The required down payment can be lower than conventional financing. Business owners can finance a significant chunk of the project costs – up to 90%.
- The maximum amount for a 7(a) loan is $5 million. The repayment term can be longer than conventional business loans – up to 10 years.
- Interest rates are often favorable.
- Veterans may be eligible for reduced fees under the Veterans Advantage Program.
One downside: the lender is required to tie up your personal real estate as collateral by placing a lien on your home. This can hamper future personal plans, such as your ability to sell your existing home and buy a new one.
The 504 SBA loan can be used to finance real estate, facilities and equipment. A 504 loan is not a good option to get a new franchisee business going because of the limitations of what you can use the funds for. But it may be appropriate for existing franchisees who want to grow and expand by, say, buying a new building. SBA 504 loans can have terms up to 25 years for real estate, with favorable interest rates.
Best Franchise Financing Sources
One of the best advantages of working with a franchise advisor or consultant is referrals to companies that specialize in franchise financing. “Experienced advisors have a wide range of contacts and can refer you early in the process, without any sort of commitment or costs,” says Miller.
Another option is your local community bank if you have a good relationship there. And there are online sources including:
ApplePie Capital – ApplePie Capital is a lending marketplace focusing exclusively on franchise loans. It brings together a nationwide network of lending partners. It also offers its own conventional loan product called ApplePie Core. ApplePie Capital supports first-time franchisees and existing franchisees.
Credibly – Credibly offers a variety of loans for small business owners, including for franchisees.
SmartBiz – SmartBiz is known for being experts in SBA lending for small businesses. But the group also offers bank term loans.
Balboa Capital – Balboa is best for franchise financing for existing franchisees (in business at least one year with $100,000 in revenue). Balboa works with a variety of franchise brands. It provides options such as short term and medium term loans.
OnDeck – OnDeck offers term loans and a business line of credit product. Requirements are a credit score of at least 600 and one year in business.
Funding Circle – Funding Circle is a marketplace that underwrites and funds loans for small business borrowers and then finds institutional investors for those loans. Funding Circle is best for existing franchisees, and offers SBA 7(a) loans and term loans up to 10 years in length.
CAN Capital – CAN is best for existing franchisees and offers a short-term loan of 6 to 18 months. The maximum amount is $250,000. CAN also offers merchant cash advances.
In addition to the above lenders, the franchisor may offer options, as per the next section.
Franchisor Provided Financing
Many franchisors are willing to provide franchise finance resources in some way. Assistance takes various forms, as follows.
In-House Franchise Financing
It’s possible to find franchisors that offer in-house financing, but it’s the exception rather than the norm. “Only about 12% of franchisors offer in-house financing,” says Miller.
One example is 7?Eleven. Its website says it has “an internal program that provides up to 65% financing on your initial franchise fee. This program, which is uncommon to most franchisors, also provides an open account (or financing) for the inventory purchases and operating expenses of your store.” Ask the franchise sales representative or your franchise advisor for any in-house options.
Preferred Franchise Lenders
Many franchisors have “preferred lender” partners. The franchisor sets up a working relationship with one or more lenders that offer financing to its prospective franchisees. Subway, for example, offers three preferred lender choices: Ascentium Capital, JenCas Financial and IPC Franchise Financing.
Other franchisors simply point you toward a list of franchise lenders. Auntie Anne’s documentation says, “we can provide a list of lenders who have expressed interest in lending to franchise partners.”
Some franchisors engage a financing consultant to work with you — for free. Moe’s Southwest Grill, for example, states that it “may engage an advisor who will provide consulting services to franchisees to assist them with securing financing and it pays the advisor for this assistance to franchisees.”
Franchisors today may offer incentives to encourage new business. Incentives include reducing the franchise fee and relaxing other requirements to make it less expensive for a new business.
For example, hundreds of franchisors provide incentives to U.S. veterans, active military and sometimes military family members. See the listings on the VetFran website. If you are transitioning out of the military, also check with the VA’s Transition Assistance Program (TAP).
“Not only are more brands honoring discounts for military families, some have extended the same consideration to first responders,” says Miller.
How Do You Qualify for Franchise Financing?
Qualifying for a franchise loan is similar to qualifying for any other kind of loan. Remember, to start you also need to meet the franchisor’s requirements. At a minimum you will need these qualifications:
- Acceptable personal credit history. Your personal credit score reflects whether you are reliable as a borrower. Check your credit history to make sure all information is accurate before applying for any kind of franchise financing. Your small business credit score may also come into play if you apply for credit for an existing business.
- Required down payment. Almost any kind of SBA or conventional business loan will require a down payment.
- Financial information. Be prepared to submit a business plan — or revenue and expense forecasts, or a P&L.
- Franchise information. Lenders want to know: is the franchise brand an established name, with a track record of successful franchisees?
How Do You Buy a Franchise With No Money?
The short answer is: you cannot buy a franchise with no money. Every franchise requires an initial investment. While it’s not possible to buy a franchise with no money, you can target lower-cost franchises. See:
If you have no money at all, think longer term — and plan. Sometimes it’s best to step back, accumulate savings, and apply for financing options later after your financial situation improves.