Starting and expanding a franchise business may require partnering with a lending partner who understands the business model and is willing to walk with you.
A franchise business model is relatively different from other businesses because you do not start from scratch and may not have full autonomy in running your business. You also may not have full autonomy regarding financing.
If you want to start or expand your franchise business, this guide can help you with some critical considerations you will need, so keep reading to learn more.
What to Expect
The collateral a borrower provides when seeking financing is critical when determining whether they qualify for a loan. However, not all types of businesses may have assets to present as collateral. But a lack of such collateral only sometimes means that the business does not qualify for lending, so lenders have to come up with alternatives for determining such as a franchise’s creditworthiness.
A franchise’s value or cash flow becomes a consideration in such circumstances. You will still be required to show proof of creditworthiness. Typically, lenders require borrowers to provide EBITDA, a metric for measuring a business’s overall health and ability to generate future income.
“The concept around which a franchise is built is also a critical factor in the valuation of a franchise. If the concept has consistently positive results, your business’s valuation can increase significantly,” says franchise lawyer Jason W. Power of Franchise.Law.
Choosing Your Loan
You can only access as much financing for your expansion and business starting goal based on your business’s or your partnering franchise’s valuation. Lenders tend to favor well-established franchises with a record of solid performances in many locations when financing franchises.
Your prowess in business as an individual can also be a consideration lenders may consider. For example, if you have other successful business ventures, your chances of getting finances for your franchise business can improve significantly. Conventional business loans may be your best option if you have good standing as a borrower or are affiliated with a proven franchise.
For a lower-value enterprise, you may want to consider a Small Business Administration (SBA) loan, which has limitations such as strict approval requirements, expensive paperwork, long approval times, down payment requirements, and a requirement to show proof of trying other lenders first.
Get A Bank That Supports Your Individual Goals
Most lenders will look at franchisees in the light of the franchise you are under. However, being a franchise doesn’t mean your business is similar to every other franchise business.
So, while your business model may still be a consideration, you want to work with a bank or lender that treats you as an individual rather than put you in a franchise lending box.
For example, two franchisees, one having one store and another 20 of the same type of business, will have entirely different risk profiles and thus must be treated differently. So, you want to choose a lender that provides customized solutions for every borrower.
Other Financing Options
You are not limited to seeking financing from traditional lenders. Some viable alternatives include in-house financing, angel investor funding, and crowdfunding.
In-house funding is where you get funding from the franchise you invest in through agreements between the franchise and a specific lender to offer financing to franchisees. Angel investors are where you find a high-value individual who grows their money by investing in businesses that show potential.
Crowdfunding uses a pool of investors to raise funds in exchange for shares, free products, or discounts.
Media Information:
Franchise Law
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