The 3 Best Financing Options When Buying a Franchise

Across the U.S., franchise businesses produce $760 billion of revenue and employ over 8 million people per year. Those are the kind of numbers that might inspire you to open a franchise business of your own. 

However, when you zoom in on how much it takes to finance opening a franchise, you might feel less inspired. The upfront cost of opening a franchise is typically tens of thousands of dollars. 

Luckily, a whole host of financing options exist for entrepreneurs hoping to open their own branch of a franchise.

Here’s your guide to navigating your options:

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How much does a franchise cost?

Before you dive into a search for the right franchise financing, make sure you understand all of the costs that come with opening a franchise. 

Some will be one-off, upfront expenses, while others will be expenses that you’ll need to pay throughout the life of operating your business. Most franchise financing options will be designed to cover the upfront costs, but it’s worthwhile to consider each and every expense that will cross your desk if you choose to open up your own franchise branch, including:

Franchise fees

Before anything, you’ll need to contend with the franchise fee.

Franchise fees for new branches range from $20,000 to $50,000 and may cover the cost of training, support and site selection. However, what the franchise fee covers will vary from franchise to franchise, and this fee may only cover the license to use the franchise name and brand. 

Franchise fees are the main upfront cost of opening up a franchise, so franchise financing typically makes this one-time expense more feasible. 

Royalty fees

As your branch begins to generate revenue, you’ll have to start paying royalty fees to the franchise company.

Royalty fees are typically a percentage of your sales that range from 4 percent to 6 percent, though they can vary as widely as 1 percent to 50 percent of your revenues. Franchise companies will typically bill for these on a weekly or monthly basis. 

Related: 5 Best States in Which to Open a Franchise in 2019

Miscellaneous expenses

Opening up a franchise branch will also come with various fees depending on what kind of franchise you opt for. These can seriously add up, so be sure to keep them in mind while you’re searching for franchise financing. 

The costs of opening up a franchise branch can include:

  • Purchasing real estate
  • Business insurance
  • Purchasing equipment
  • Build-out costs for your franchise location
  • Franchise attorney fees
  • Purchasing inventory 
  • Purchasing supplies
  • Training travel expenses

Again, some franchise companies will put your franchise fee towards some of these upfront costs. When deciding between franchises, one huge consideration should be your upfront investment and how much that will cover once you get started. 

The top three franchise financing options

Now that you have an idea of what franchise costs you might need to cover with franchise financing, let’s take a look at your top three options for making these costs more manageable:

SBA franchise loans

If you have solid personal financial history and you’re looking for the cheapest franchise financing possible, then an SBA franchise loan is your best choice. You can finance a franchise through two types of SBA loans: SBA 7(a) loans and SBA CDC/504 loans

SBA 7(a) loans offer up to $5 million of financing that can go toward a wide range of uses, like equipment, real estate and working capital. SBA CDC/504 loans, on the other hand, are meant specifically for commercial real estate purchases but can offer up to $20 million in financing. 

If you qualify, SBA loans are solid options for financing franchises. Just be sure to consult the SBA Franchise Directory to make sure your chosen franchise is SBA-approved before you apply. 

Alternative lender franchise loans

If you can’t qualify for an SBA loan to finance your franchise branch, look to alternative online lenders instead. Online lenders offer business financing to entrepreneurs who aren’t traditionally qualified to access bank or SBA funding. If you have a personal credit score of less than 680, then alternative funding will likely be your best bet. 

Alternative business loans don’t have terms as generous as SBA or bank loans—the funding amounts tend to be less, the repayment terms tend to be shorter, and the rates tend to be higher.

That said, alternative lenders offer up a variety of funding solutions that SBA lenders can’t, like medium-term loans, business lines of credit and short-term loans, that can work for franchise financing. 

Franchises that offer financing help

Finally, if you need to access franchise financing, you can also go right to the source.

Some franchises like The UPS Store, Marco’s Pizza and Gold’s Gym offer financing options to branch owners. 

Marco’s Pizza, for instance, will offer a third-party guarantee to banks for new branch owners, which will make financing much easier to qualify for. Meanwhile, The UPS Store offers financing with fixed rates of just 6 percent. Gold’s Gym offers funding for existing franchisees to open up second, smaller “express gyms” with no money down. 

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Financing a franchise purchase: Next steps

Now that you’re familiar with the ins and outs of financing a new franchise branch, what are your next steps? 

Start to narrow down your list of potential franchises you’d like to own and operate. Based on these top financing options, consider how much debt you’re willing to take on and can afford. Ask yourself, which of your franchise options fit within that budget? This step should seriously shorten your list.

At the end of the day, the best franchise financing option for you is the one that you can pay down without breaking the bank.

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