Opening a franchise can drain your funds because of the 1000 different new expenses. Even when you take this action with a cash reserve, you’ll quickly understand how this business decision is always hard on the pocket. 

Therefore, most business owners don’t spend personal savings or sell assets for a franchise of their dreams: they finance it through proper sources and pay off strategically. Now, if you think bank loans are the only options for this financing and dread their standard terms, be at ease because the market offers multiple options. 

This guide explains the top franchise funding methods for new and multi-unit owners who want to start their business in more locations. Keep reading and understand which option will suit you well.

Top Franchise Funding Methods for New and Multi-Unit Owners

Franchise financing, as the name indicates, is the process of securing funds to cover the costs of opening a new business location. But be clear that the lender wouldn’t cover the full cost: they’ll expect you to bring a percentage of the total cost to the table as a down payment. 

With your down payment and the loan amount, you can complete this expensive task. Once secured, you can use this borrowed money to purchase a new property, get business equipment, or stock the inventory. 

Now that we understand how franchise financing works, let’s explore a few practical options you can avail. 

SBA Loans (7(a) or 504)  

Lenders prefer low-risk deals, and SBA loans meet that requirement. These are government-backed loans with lower down payments and longer repayment terms. Such favorable terms can support a business to safely take flight and add more locations to its portfolio. Notably, the Small Business Administration (SBA) does not directly lend you the money: instead, it guarantees a portion of the loan to reduce lenders’ risk and allow them to offer better terms. 

As a result, lenders are more willing to approve borrowers with moderate credit and less collateral because they have the SBA’s backing in such deals. It’s worth mentioning that your down payment in this franchise financing will be 10%-30%, and the remaining amount required for setup costs will be covered by the loan amount. 

Franchisor Financing 

If you’re buying a company’s franchise, it might have an in-house financing option. Instead of financing the branch from a lender, you borrow from the franchisor or let them connect you with lenders they have already built relationships with. 

If your franchisor offers this, you’ll repay them over an agreed term and open a new branch for the business. Or, if they point you toward a vetted lender, even that’s a route worth exploring because that’d mean a known business backing you, which can hopefully make the terms better. 

ROBS (Rollover for Business Startups) 

Rollover for Business Startups (ROBS) is a financing agreement that allows you to use retirement savings you have already built up in a 401(k) or IRA.  Here is how you make it work without paying early withdrawal penalties or triggering a tax bill:

You form a new C-corporation, which sets up its own qualified retirement plan. Then, you roll your retirement funds into the new plan, which uses said capital to purchase stock in your corporation. Eventually, the new corporation funds the franchise. And because the money moves as a rollover investment and not a withdrawal, the IRS does not classify it as taxable income, and you also don’t pay any penalties. 

Put simply, if you have sufficient retirement funds, you can open your franchise debt-free and also without any monthly loan payments or interest cutting into your early revenue. 

Bank Loans 

Then comes the most obvious option: a bank loan whose process is pretty much standard. You apply for franchise financing, which urges the bank to thoroughly inspect your financials. They’ll check your credit history, income, any collateral you’re offering, and financial profile. If you qualify after the detailed scrutiny, the bank lends you the required capital.

Do note that, unlike SBA loans, a government guarantee isn’t involved in these loans, and the banks take on the full risk. Therefore, they hold applicants to a higher standard. A strong credit score, solid collateral, and a viable business plan are the basic requirements of this financing. 

Equipment Financing

Outfitting a new location is expensive, and paying for it all up front is not viable. That’s when you can use equipment financing to acquire the required items—kitchen items, POS systems, vehicles—while spreading their cost over time. 

Naturally, the purchased equipment serves as collateral for the loan and makes its approval more straightforward. If you manage to finance costly business equipment, your primary cash flow and lines of credit stay intact and available. 

Conclusion 

Setting up a franchise is as overwhelming as it is necessary for your growth. But with the help of practical financing solutions, you can take this bold step and continue your journey of success. If you need further information about these tools and how they can support your plans, ROK Financial experts are here. We’ll explain the nitty-gritty of these loans and make sure your decision is well-informed. 

FAQs

Can you buy a franchise with bad credit?

Doing it with bad credit is difficult, but not impossible. Some franchisors and alternative lenders will still work with you. However, that will mean higher rates and tighter terms.

What if my franchise struggles to turn a profit early on?

You’ll still have to repay the loans, which is why most operators plan for 6 to 12 months of operating expenses as a cash reserve before opening a new franchise.