Owning your own franchise gives you all the freedom you’ve ever wanted as an entrepreneur – with an edge.
Unlike start-ups, franchisees aren’t starting from scratch. By working with an established brand with a proven business model, your chance of success begins as soon as you open your storefront.
This is a powerful value proposition for the entrepreneurial go-getters who are looking to accelerate growth despite lacking a unique business concept.
Of course, franchising isn’t for everyone. When you decide to open a franchise store, the parent company sells you the right to its business name, product and brand. This agreement gives you less flexibility to control business decisions. From the products you serve to the design standards of your store, you are bound by the franchisee agreement.
If becoming a franchisee is something you are considering, keep reading.
Costs of Opening a Franchise
In terms of starting costs, a franchise isn’t much different than any other business. You can expect to pay for real estate, equipment and supplies. Depending on the nature of the business, hiring and training staff will also be necessary.
Aside from these, franchisees have at least two unique costs to unlock the secrets of the parent company. According to the folks at Nerdwallet, these costs include:
- Franchise fee: Most parent companies charge an upfront free to open a franchise store. This fee normally covers things like training and operating guidelines. Franchise fees vary based on company and industry.
- Royalty and advertising fees: This is how many of the large franchise companies make the bulk of their earnings. By owning a franchise, you’ll likely have to pay a percentage of your sales to the parent company. Like the franchising fee, royalties vary by company.
Are you still on the fence about whether a franchise store is right for you? Check out the Red Door Capital Blog for the latest business resources. We cover a variety of business topics from boosting productivity to equipment financing and everything in between.
Financing Your Franchise
For many aspiring franchisees, financing is the number one hurdle. Franchise fees and royalties also leave many would-be business owners apprehensive about operating under a parent company. As we mentioned at the outset, there are pros and cons to opening up a franchise store. The good news is access to financing (or the lack thereof) doesn’t have to be a con if you work with the right service providers.
In other words, there are plenty of financing options out there. Below we look at four ways to fund your franchise.
For starters, it may be possible to obtain a loan directly from the franchiser. Some parent companies are willing to help you out by waiving fees or helping you get other loans. This will be covered in the Franchise Disclosure Agreement.
Another popular route is a Small Business Administration (SBA) loan, a government program that provides access to capital for various business and entrepreneurial projects.
The SBA Advantage Loan is a guarantee from the government that it will help you mitigate some of the risks associated with your new business. For this type of loan, you’ll still need to go through traditional bank underwriting.
About 10% of all SBA loans go to franchises, with financing ranging from $250,000 to $500,000. Most of that money goes toward franchise entry fees as well as working capital.
For the complete A to Z on SMA loans, read: SBA Loans Aren’t For Every Startup.
A third option is obtaining a traditional loan from a bank of credit union. Although banks are more likely to fund a franchise over a startup, you’ll still have to pass their stringent lending criteria. Things like net worth, down payment and credit history are crucial. You know more than anyone whether this will help your application or hinder it.
Other Sources of Financing
If the traditional lending route doesn’t appeal to you, another option is to go through a broker or financial services company. These service providers are usually very well connected to the industry, which means they can connect you with lenders who may be able to help you.
Red Door Capital Group does just that. We’ve built our company with the purpose of connecting with local, regional and nationwide lenders that offer various financing solutions. Whether you’re financing a franchise, startup or some other business venture, we can help you find the correct approach. Contact us today to learn more.
Financing a Growing Franchise
Your need for financing doesn’t end after you’ve opened up your franchise. Expansion, seasonal downtrends and new equipment upgrades are all reasons to consider financing after you’re up and running.
Although the same lending sources apply to expansion, many franchisees opt for alternative lenders to fund things like cash flow and equipment purchases.
Red Door Capital offers a variety of financing solutions to franchisees in need of cash. Our solutions include:
- Cash flow
- Cash management and merchant services
- Growth and expansion
- Credit and debt services
We also provide equipment leasing and financing services for franchisees and small business owners. You can learn more by reading: Equipment Financing: What are the Options?
A Few Things to Consider
Getting funding for your franchise may seem intimidating, but rest assured that lenders usually favor businesses with established brand names and long track records. If you’re thinking about opening a big brand with a large national and global presence, your chance of obtaining a loan is probably higher.
The same guidelines that apply to small business ownership also apply to becoming a franchisee. In other words, don’t rely on a brand name to skimp on your loan application. Keeping your debts at a minimum when you start is also important.
Most importantly, be sure to work with a professional who can help guide you through the process. They will be honest about your options and can work with you to make your dram a reality.
Red Door Capital works with franchisees and small business owners all across the state of Florida. Give us a call to discuss your franchising needs today.
Entrepreneur.com. Finance Your Franchise.
Teddy Nykiel and Jackie Zimmermann (April 28, 2017). “Where to Find Franchise Financing.” Nerdwallet.
The Wall Street Journal. How to Finance a Franchise Purchase.