Alternative Funding for Small Businesses

Franchise Financing Options

You’ve decided to open a franchise business - the first thing we should say is a big congratulations. It’s a great decision and the journey is less of a risk knowing that you can rely on the established brand name and support from the franchiser. However, one hurdle that many people struggle to overcome is financing. Whether you’re launching a new franchise, or you require support for an existing franchise, you’re in the right place.

Previously, a bank loan was the only real option for franchisees. Today, we’re in a very different market, and this is great news for those financing a franchise business. In this guide, we’re going to explore alternative funding for a franchise business as well as everything you need to know about your franchise financing options!

Choosing a Finance Option

Before launching into the many different suggestions for funding to purchase a franchise, it’s important to consider your options carefully and choose the right route for not only yourself but the future of the business too. Don’t rush into any decisions - instead, consider the different financing options in this guide.

As you’ll see, each financing option is unique and will affect your business differently. Think about the amount you need to borrow, how you want to pay the amount back, and the solutions that best benefit the business. The last thing you want is to launch the business and have constant money worries for the first two years.

 

What’s Franchise Financing?

As the name suggests, this niche is all about helping aspiring business owners to purchase a franchise. Rather than starting a business from scratch, you’ll buy into a brand and launch a new location for a company already established in the market. As an example, you might open a gym with a brand name already established in the United States. As well as benefitting from the brand name, you don’t need as much marketing and the head company is likely to also offer training and other resources to get started.

While most people link franchise financing to the initial launch, you also need to think about day-to-day running costs and getting over initial challenges. Thankfully, franchisees are in a better position than other small businesses to obtain bank loans. However, the process still comes with long applications and waiting times - conditions not ideal for those who want to get started immediately.

With this in mind, more and more people are turning to alternative financing. The great news is that alternative funding for a franchise business is a niche that’s continually expanding. South Florida Funding Group is an exemplar of the improving niche and options are aplenty for aspiring franchise owners.

Funding to Purchase a Franchise

The wait is over, this section will explore all the different funding options available to those who want to launch a franchise. As well as those at the beginning of their journey, we’ll also provide options for those who need to buy new equipment or meet short-term demands.

1. Small Business Franchise Loan (Bank)

Although we highly recommend alternative funding for most people, we shouldn’t ignore small business franchise loans from the bank for those with strong credit. Sadly, there are many reasons why bank loans aren’t available for some. This includes:

• Lack of collateral
• Poor credit score (or no credit history)
• No experience in the industry
• Not enough time to wait for application and acceptance

Even though you’re less of a risk as a franchise, banks are still reluctant to lend to new business owners. The benefit of a bank loan is the long-term nature of the agreement and the maximum borrowing amounts (often up to $5 million). On the other hand, many banks require a history of profitability. While this is fine for some, others are only starting their adventure.

2. Equipment Financing and Leasing

If you currently buy your mobile phone or car on finance, you’ll know exactly how this sort of agreement works. Rather than getting a loan and buying equipment this way, South Florida Funding Groups offers franchise owners a chance to finance or lease their equipment.

Equipment Financing - If you choose this route, you’ll essentially buy the equipment while paying over a set period. For example, it might be that you make payments over 24 months. You don’t need collateral because the equipment itself secures the loan; if you fail to make payments, the company will take the equipment from you. In the end, all payments are made, and you officially own the equipment.

Equipment Leasing – On the other hand, the difference with equipment leasing is that you don’t own the equipment You pay a monthly fee, you have the equipment on-site, but the equipment returns to the supplier at the end of the contract.

Equipment financing and leasing are helpful for small franchise owners because it provides access to equipment without having to pay everything upfront. While you own the equipment with financing, you’re never the owner with leasing. Fortunately, the application process is simple, and most people get a decision within 24 hours.

Elsewhere, you’ll only need three months of historical business activity (with at least $6,000 in monthly revenue!). While some contracts only last for six months, others allow you to finance or lease for 24 months.

3. Small Business Administration Loans

If you haven’t seen these loans before, they are supported by the government. With a partial guarantee from the Small Business Administration, it lowers the risk for lenders and allows small business owners to get much-needed funding. Depending on the franchise age, you might use an SBA loan for equipment financing, debt refinancing, day-to-day running costs, or even real estate as you expand.

In some cases, the government backs up to 85% of the loan, which means that you only need to provide collateral or security for 15%. While approval takes a couple of weeks and you need a couple of years in business, you could get approved for up to $10 million and repayment is often spread across many years.

4. Merchant Cash Advance

Bank loans aren’t an option for everyone, and another alternative is a merchant cash advance. As a franchise loan broker, South Florida Funding Group helps with merchant cash advances. Here, you receive a lump sum and in return offer a small percentage of future income for a set period. For example, you might borrow $200,000 and give 10% of your future income for a while.

The name gives the secret away, but you’re essentially getting an advance on your income. You get the money you need now and repay it with future income. Among others, this suits seasonal franchises and others who know that money is just around the corner. Approval is fast, you only need three months of bank statements, and you can borrow up to $500,000.

5. Crowdfunding and Family/Friends

We’re big supporters of alternative funding for a franchise business, but we also support healthy financing. For some, this comes through crowdsourcing or family/friends. With crowdsourcing, you create a page on a crowdfunding website and encourage people to invest in the business. If you don’t have a perfect credit history (who does?), this is one way to raise money without the extortionate interest rates that often come from banks and other loan products.

Alternatively, bypass all banks and other organizations by simply borrowing money from family members or friends. While some people ask for a gift from family members, others ask to borrow money or even allow family and friends to join the franchise as a partner.

If you’re going to choose this method, make sure that you draw up a contract. Although it might seem unnecessary with somebody that you’ve known for many years, it could just protect the relationship and prevent problems later in the process. Make sure that everybody understands the agreement, the repayment details, and all other aspects of the deal.

6. Unsecured Line of Credit

Sometimes, you just need access to funds without having a specific purpose for the money. Rather than borrowing hundreds of thousands, you need a line of credit for small purchases and for the peace of mind that money is available whenever required.

If you choose an unsecured line of credit, you get control over when and where you use the money, you’re only charged interest on the amounts you borrow, and it provides the business with an emergency fund. Of course, you shouldn’t choose an unsecured line of credit if you’ll have trouble repaying the amount. Unfortunately, this will only grow your debt and restrict the business’s ability to borrow in the future.

Depending on the provider, you’ll get acceptance within a couple of days and could gain access to the funds within the same week. However, you’ll need at least six months in business as you borrow up to $500,000.

7. Secured and Unsecured Business Loans

On a similar theme, you can obtain either a secured or an unsecured business loan. Generally speaking, unsecured business loans allow you to forgo the collateral and use your own credit instead. Naturally, you’ll need a strong credit score and history for this source. Since it’s riskier for lenders, you may have to endure a higher interest rate.

On the other hand, a secured business loan is a more traditional option where you back the loan with an asset. You can borrow up to $5 million, but you won’t have as much time to repay the loan compared to an SBA and other forms of loans. As we saw with the unsecured line of credit, some people receive the funds in the same week as their application.

8. Other Solutions

As mentioned previously, the alternative funding for a franchise business niche is only growing. You may also find the following worthy of your interest:

• Stock Loans - Here, you’ll leverage your stocks and take a loan on these stocks without losing ownership of them. You’ll still enjoy the increases in the stock price as well as the dividends, but it allows you to borrow on the stocks (and quickly, at that!).

• ACH Advance - Rather than a merchant cash advance, this one is slightly different because you’ll repay the borrowed amount through money in your bank account rather than from your sales numbers.

• Asset-Based Financing - If your franchise has assets, you may be able to use these assets as security to borrow. Depending on the circumstances, you can use your own personal real estate or real estate belonging to the franchise. The asset becomes collateral, so make sure you have the funds to keep paying the amount off if you don’t want to lose your real estate.

• Specific Industry Loans - Finally, be sure to research loans within your industry because some lenders now have specific products available to franchisees within a certain industry. For example, it might be a Fix & Flip loan, designed to help people in real estate. With a loan specific to your industry, you’ll enjoy favorable terms and lenders that understand your position.

Work with South Florida Funding Group

Ultimately, the best way to start financing a franchise business is to work with a franchise loan broker. At South Florida Funding Group, we’ll learn about your business and provide the best options given your credit score and history, business history, the funds you need, and more. After considering all the important factors, we’ll advise on the best route, and you’ll have alternative funding for a franchise business.

We’re a professional service and we’ll consider how you plan to use the money and all the other critical factors. While some people are best placed with a merchant cash advance, others are better off with equipment financing. Contact our brilliant team today for advice and to start the journey towards franchise financing!