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What are the Best Sources of Franchise Financing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 January 2017
  • Copyright Protected:
    2003-2017
    Conjecture Corporation
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Franchise financing is a major concern to anyone who wants to open a franchise associated with a well-known business. The idea is to secure the funds needed to launch the business and keep it afloat financially until the franchise begins to turn a profit. There are several viable sources for franchise funding that can be investigated well before securing the franchise, making it possible to move quickly once the franchise is granted.

One of the most common ways to manage franchise financing is through the local bank. Assuming that the potential owner of the franchise has a solid credit rating, and possesses the skills and background to successfully operate the business, there is a good chance that the bank will be willing to extend a business loan with equitable terms and conditions. When the applicant has an established relationship with the bank that is already considered to be mutually beneficial, the possibility of utilizing this means of financing the franchise becomes even more likely.

There are also lenders who specialize in providing franchise financing. Sometimes referred to as franchise funding specialists, these lending institutions often provide interest rates and contract terms that are superior to those offered by other types of lending institutions. In many cases, the qualifications that the applicant must meet are somewhat more comprehensive than the criteria used by other lenders. This means that not everyone who applies for financing through this type of lender is likely to be approved, even though the lender is focused on providing assistance in creating new franchises. This can be good for the borrower, in that the strict qualifications may call attention to factors that the applicant had not considered previously, and thus make it possible to refine the business plan and increase the chances for success over the long-term.

Private funding is also a means of obtaining the franchise financing needed to launch a business. Friends and family members may provide financing with liberal terms, which can speed the process of retiring the debt. Angel investors may also see potential in the franchise, especially if it will involve multiple business locations within a defined geographical area. With this type of financing, it is important to prepare a loan contract that is agreeable to all parties involved, complies with local regulations, and protects the interests of both the lenders and the borrower.

In general, it’s a good idea to only seek franchise financing from sources that are well-known and considered to be ethical, financially stable, and have a good reputation for working with lenders. Doing so can help the franchise owner from experiencing unanticipated difficulties with the lender at a later date, and thus undermining the business. Checking the status of the lender, whether that lender is a financial institution or an angel investor, may take some time, but is well worth the effort in terms of creating a viable working relationship.

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