Just as there are several types of business loans, business owners have several options when choosing franchise financing. That said, some types of financing are more appropriate for new franchisees, while others are better suited to those trying to grow their existing franchise business or need help with operating costs.
Here are some of the most popular ways to fund a franchise:
1. Online business loans
Online business loans are term loans that potential borrowers can apply for online without having to visit a physical bank. Alternative lenders offer a simpler application process that can be completed online. Loans are generally available for up to $500,000 or more and, as with traditional business loans, borrowers receive a lump sum disbursement.
While online business loans can be a great way to fund franchise growth, they may be less accessible to startups and new business owners. Prospective borrowers trying to purchase their first franchise may struggle to meet the minimum business time and annual revenue requirements of some lenders.
2. Commercial lines of credit
Lines of credit allow borrowers to access liquidity up to a borrowing limit defined according to their needs. Business lines of credit range from $2,000 to $250,000, with interest rates between 10% and 99%. Interest accrues only on the outstanding credit balance, and borrowers can pay off their balance and reuse their line of credit until the end of the drawdown period, usually between 12 and 24 months.
Business owners can use their entire line of credit to finance a franchise, but this form of financing is best used for ongoing operating costs. Lines of credit are also suitable for experienced franchisors who want to expand their current business, rather than new franchisees who may not qualify.
3. SBA Loans
The SBA offers small business owners a wide selection of loans, including its popular 7(a) Loan Program. Loan amounts range up to $5 million and the funds can be used for most business purposes, including buying a franchise. That said, SBA loans involve a lengthy application and approval process and may not be suitable for borrowers who need quick access to cash.
4. Of the franchisor
Some franchisors streamline the financing process by helping new franchisees get loans and offering a discount on fees. However, this offer is franchise specific and not all prospective business owners are eligible for support. Visit the company’s franchise website to see if it offers financing, and consult the franchise disclosure document for any relevant financing information.