Regardless of whether you’re a franchisee, a franchisor or are a small business owner looking to branch out, developing a franchise is going to require financing. The available methods for start-ups and established franchises hoping to expand tend to change with time, so it’s important that you keep abreast of the latest developments so you know what your options are. No matter which choice you make, new franchisees should be aware that today’s lenders need to see that you have a significant personal investment in the business before they make any offers.
When compared to independent businesses, franchises tend to have lower default rates. As a result, it is typically easier to lock down financing. Investors and lenders often favor franchised businesses because the owner has experience in the marketplace and an established brand with an audience and goodwill.
However, regardless of where you fall on the franchise experience spectrum, easy credit is nearly impossible to come by in the modern economy. Those doing the investing and lending need to see established operator participation, major investment on the part of the owner and a strong business plan.
The Cost of Franchising
There are typically three components to the cost of a franchise:
- Initial franchise fee: You pay this fee to the franchisor in order to join his or her franchise system. This amount varies depending on the person you’re dealing with, but ranges anywhere from $2,000 to $200,000 for one unit. Territorial rights are often bundled with a single unit sale, meaning that this initial fee can increase dramatically. People typically find the funds for this fee via equity investments on the part of the franchisee.
- Facility construction costs: If you’re planning on purchasing a franchise in a quick service restaurant, these costs can quickly add up because of the carefully dictated building and equipment requirements from the franchisor. Otherwise, these costs may encompass everything from manufacturing equipment to computer software. The funds for this kind of undertaking usually come from banks, governments and equipment vendors.
- Inventory costs: Depending on the industry you’re entering, this is the cost that can vary the most. If you’re dealing mostly with physical products, such as computers or automobiles, this cost will be large, while service-based businesses are much cheaper.
Traditional Methods of Financing
Historically speaking, financing from private banks has been made available to prospective franchisees with personal assets that can be pledged as security or to those with a great deal of business experience. Approach the Small Business Association (SBA) about guaranteeing part of a lending institution’s loaned funds.
Contemporary Methods of Financing
In the modern economy, franchisors (especially those who are publicly traded) in new markets depend heavily on rapid growth. Rapid growth is a stimulant for sales and eventually profits. This also permits franchisors to grow their brand at a faster rate than their competitors in the market, thereby seizing a larger portion of the market. In addition to the strength of the franchisor’s products, services and brand recognition, success is also coming from an ability to craft creative and competitive financing programs sponsored by the franchisor. For your reference, these financing programs essentially break down into three groups:
- Program for franchisor-financed area development
- Program in which franchisees purchase franchisor equity
- Development and sale method
The Key to Programs for Successful Financing
Regardless of whether you choose to go with a traditional or innovative method, a successful financing program needs to have a healthy partner relationship between franchisor and franchisee. Growth is far more likely when a franchisor helps to expedite the process of development.
The franchising process is quite complex, no matter if you’re the franchisor or franchisee. Ask for legal help when necessary and you’ll be on your way forward in no time.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.