Franchising offers business owners the opportunity to be associated with a well-established brand name and product line, while remaining independent operators. Franchise opportunities are available in many fields and are particularly common in retail and hospitality. Fitness centers and hair styling also feature high on Entrepreneur’s 2017 Franchise 500 Ranking.
Franchises are recognized as qualified recipients of the Small Business Administration’s (SBA) 504 loans, an affordable financing option available to small business owners. Franchises have the same options for 504 loan financing as all small businesses and reap the same benefits. Franchise owners in need of real estate or franchisees who want to expand should consider it among their financial options.
The Costs of Opening a Franchise
The requirements for opening a franchise and the amount of financial support you receive from your franchisor varies across a wide range depending on the franchise. The costs of a franchise include a one-time franchise fee and ongoing royalty payments. You will also need inventory and working capital to open with, and you may be charged an advertising fee. You might be required to purchase and install specific signage as well. According to the Entrepreneur list, you can open a 7-Eleven store or a RE/MAX realty office for under $50,000, while a Hilton or Intercontinental hotel starts at several million dollars.
Training in standardized operating procedures, followed by ongoing support, such as consultations, collective buying and ready-made packaging, are usually available to franchisees and are part of the attractiveness of this business model. The Small Business Administration has its own business educational programs to support borrowers.
How to Finance Your Franchise
As with any business, opening a franchise can be risky. You should research your potential franchisor thoroughly and shop around, as the conditions franchisors offer can be quite different. You will also want to choose a franchise that will thrive in your local market.
Many franchisors offer finance plans to new franchisees, although they are often only willing to finance a small portion of the total project cost. In addition, there are secondary companies that offer financial services, like lender matching, specifically to franchisees. Many of these companies specialize in a small circle of franchisors, making this type of financing easier to receive for some companies than others. As always with non-bank lenders, the business owner should study the conditions offered by these lenders carefully, as they may compare poorly with bank financing.
Banks often finance franchisees. To qualify for a bank loan, you need an excellent personal credit history and collateral. The creditworthiness of the franchisor is also taken into consideration by the bank—your financial future will be bound up with your franchisor from then on.
Franchising and the SBA 504 Loan
Often banks are more willing to work with a client within the 504 loan program. The 504 program has advantages for both the borrower and the bank. A 504 loan can help a business owner purchase real estate or equipment for their franchise with only 10% down and at a fixed, below-market rate. It is often the best option available to a small business owner. A 504 loan covers:
- the purchase of land or buildings
- the construction of buildings
- the purchase of equipment with a service life of ten years or more
- improvement, upgrading or renovation of buildings or equipment
The 504 loan is administered by Certified Development Companies (CDC) like TMC Financing and individual loans are granted in conjunction with a conventional lender. Your CDC can help you find the best bank to partner with for your project, if you want. The conventional lender provides 50% or more of the total project cost. Your CDC facilitates the SBA loan for up to 40% of that amount, or $5 million ($5.5 million for a manufacturing project or if the project includes energy-efficiency measures). You provide a down payment of 10%.