Launching a new franchise business might cost you as little as a few thousand dollars, or could require several hundred thousand or even a million dollars of investment capital to get started with certain big-name brand opportunities. Franchise fees, equipment costs, advertising expenses, and royalties all add up fast, and the total can sometimes be seriously steep.
Whatever the amount, most new franchisees need a favorable way to finance their fledgling business. In some cases, the franchisor may offer a one-stop financing service to handle all a new owner needs.
If that’s not available, or just not suitable, there are several different options and alternatives for financing a franchise. Here’s a look at four possible choices:
Government business loan programs
One of the best options for new franchise owners is a government business loan program, although it’s always important to check eligibility requirements. If eligible, business owners can benefit from improved financing terms thanks to government-backed loan programs that share the risk of borrowing. Particularly as governments seek to stimulate an economic recovery and reverse the downturn caused by the COVID-19 pandemic, prospective business owners should make themselves aware of any programs intended to help them launch a new venture.
Partners or investors
Rather than borrowing money to start a business, one alternative is finding people with money who are willing to invest in you and your idea. In some instances, partners bring relevant industry experience to the table, not just capital. Other partners are happy to put up cash but otherwise prefer to stay in the background. Of course, whether they get involved in decisions and day-to-day operations, partners and investors all want one thing in common: a return on their investment. While you’ll benefit from reduced risk by bringing them on, you’ll also have to share your profits.
If you’d prefer not to have other investors, and your credit is good, explore the options for business loans at a few local financial institutions, or shop around for better rates at alternative lenders. If you obtain a loan, you’ll receive a lump sum up front and will be expected to pay the amount back, plus interest, in regular instalments. You’ll be better able to negotiate favorable borrowing terms if you have a strong credit history, a solid financial track record, and a robust, well-developed business plan for your new franchise opportunity.
Crowdfunding/friends and family
You could solicit cash from total strangers through a creative, compelling crowdfunding campaign. Or you could ask the people who know you best to help finance your business with informal loans. Either of these options can result in favorable, flexible borrowing terms for prospective franchise owners. They’re also especially attractive to franchisees who have poor credit, or a chequered financial past.
Needless to say, those business owners who turn to friends and family for financial help should take care to ensure the debt does not harm their personal relationship with the lender. In these situations, it’s wise to write up a mutually agreeable contract laying out the terms of the loan and have both parties sign. When everyone knows the details of the deal, you’re far more likely to avoid potential misunderstandings and hurt feelings down the line.