What you need to know about funding a franchise
Franchise funding facts
- Buying a new franchise can cost millions.
- Some franchise companies impose tougher financial standards than lenders.
- Franchisers often direct franchisees to promising lenders.
A legion of business types are going the franchise route, offering entrepreneurs a way to start their own businesses with the help of an established brand, and some management and marketing assistance. Franchises include fast-food outlets, oil-change shops or math-tutoring enterprises, among a host of other businesses.
It can be an expensive proposition. For the best-known brands, six-figure franchise fees are common, and are often accompanied by fees for training, software, insurance, initial inventory and even grand-opening costs. That's all before the business is operational and the franchise operator begins making regular payments to cover royalties and advertising.
There's a big range in the initial cost of franchise operations, but the most expensive can run north of $1 million. Franchisees, even if you have some cash, often turn to lending institutions for funds to cover the cost of getting into the business.
The lenders will want to know your financial condition, of course, but bank and credit requirements are not necessarily the first hurdle to clear. The biggest franchisers have stiff net worth requirements for new owners. In 2016, Wendy's, for instance, required a minimum net worth of $5 million and liquid assets of $2 million. Once they've proven they have the money, franchisees were eligible to make the $2 million to $3.5 million investment the company considered necessary to open a new restaurant.
If you're a prospective franchisee looking for lending help, your first stop should be the franchising company itself. Although direct loans from franchisers are very rare, many of them have relationships with lenders that know the business and have shown a willingness to help fund previous franchisees.
Subway, for instance, says it gives franchising partners a list of credit sources "with experience lending to our franchisees." On its website, The UPS Store promotes the services of an online lender that specializes in funding franchises. Many franchisers offer similar arrangements with one lender exclusively, or a group of them.
Whether looking for financing on your own or taking direction from a franchiser, you might be aided in the process by the U.S. Small Business Administration (SBA). Most franchises qualify for the agency's 7(a) loan program, its most popular, which guarantees loans of up to $750,000.
The SBA does not have a program specifically for franchises. Banks loan the money and make the lending decisions in the SBA programs, so you will need a good credit score, financial resources and a down payment. Experience in franchising or other business activity will also boost your prospects of receiving funding. But the SBA guarantees as much as 85 percent of the loan amount, so the banks do have an incentive to lend to projects they might otherwise find too risky, like startup franchises.
If you can't find a bank or other lending institution to fund your franchise, you can try other sources, including friends and family, credit cards, or the equity in your house — all of which carry unique risks.
A method mentioned commonly by franchisers and websites that gather franchise information is a Rollover for Business Startups (ROBS). The federal tax-code provision allows individuals to dip into their retirement accounts, without penalties, to start companies. ROBS funding can provide significant money, but also puts your retirement nest-egg at risk and, experts say, invites attention from the Internal Revenue Service.