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What are the best practices and tips for securing financing from a franchisor or a third-party lender?

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Franchising can be a great way to start or grow your own business, but it also requires a significant amount of capital. Whether you need to pay the initial franchise fee, cover the operating costs, or invest in equipment and inventory, you will likely need some form of financing to make your franchise dream a reality. In this article, we will explore some of the best practices and tips for securing financing from a franchisor or a third-party lender.

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Patrick Burge

Franchising expert, strategic and board advisor. Helping businesses, and the people in them, to grow.

1 Understand your options

Before you apply for any financing, it is important to do your research and examine the various funding options available. Depending on your situation, you may be able to access franchisor financing, SBA loans, bank loans, or alternative lenders. Franchisor financing can be a convenient and attractive option, as the franchisor may have more confidence in your business than a traditional lender. However, it is important to compare the terms and conditions with other alternatives. SBA loans are designed to help small businesses access affordable and reliable financing, but you will need to meet the eligibility criteria and provide a solid business plan. Bank loans may offer lower interest rates and longer repayment terms, but they can also be difficult to obtain. Finally, alternative lenders may have less stringent requirements and faster approval processes than traditional lenders; however, they may also charge higher interest rates and fees. Therefore, it is important to carefully review the terms and conditions of any alternative lender before signing up.

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Joel Bissitt VFP

Growing franchising with innovative marketing, training & support
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Look at all options. I would also advise to speak to 3rd party finance brokers to help assist with the business plan and financials for the funding proposal. They understand what the funders are looking for and this can increase success rates of securing finance. If you are financing capital equipment such as machinery, furniture then also I would look at leasing as well.

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2 Prepare your documents

Once you have identified your potential sources of financing, you should prepare the necessary documents and materials to support your application. Depending on the type and amount of financing you are seeking, you may need to provide a Franchise Disclosure Document (FDD), a business plan, financial statements, and a credit report. The FDD should be reviewed carefully in order to evaluate the franchisor's financial performance, track record, and reputation. The business plan should demonstrate that research has been done, risks and opportunities are understood, and a realistic and achievable plan is in place. Financial statements should show enough cash flow, assets, and equity to cover expenses, debt obligations, and contingencies. A credit report should reflect a good credit score, low debt-to-income ratio, and positive payment history. All of these documents will be used by the lender to assess your creditworthiness, capacity to repay the loan, potential return on investment, credit risk, interest rate, and loan terms.

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3 Compare and negotiate

After you have prepared your documents, you should apply for financing from multiple sources and compare the offers you receive. When doing so, consider the loan amount, interest rate, fees and charges, and repayment terms. The loan amount should match or exceed your financing needs but not exceed your repayment ability. Additionally, look for the lowest interest rate and fees possible as these will reduce the total cost of borrowing and the monthly payments. For repayment terms, search for the most favorable conditions possible as they will affect your cash flow, profitability, and risk exposure. Also, ask for a breakdown of all fees and charges that each lender charges and how they are calculated and paid. Once you have compared the offers, attempt to negotiate with the lenders to get the best deal possible. Leverage your documents, research, and leverage to persuade them to lower their interest rates, fees, and charges while also improving their repayment terms. Be prepared to walk away from any offer that does not meet your expectations or requirements.

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Patrick Burge

Franchising expert, strategic and board advisor. Helping businesses, and the people in them, to grow.
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Don’t get hung up on interest rates. Many people consider the loan’s interest rate as the most important factor before they apply for a loan or know if they are likely to be a successful applicant. The interest rate is important, but so are early repayment conditions, speed of access funding, the process, current and projected affordability, whether the loan can be tranched or extended, and many other factors. Maybe download your own credit score to understand your current situation, and understand for instance that the difference in monthly capital and interest repayments on a 5 year loan of ￡25000 at 6% interest and 4% interest is around ￡30 per month. So would be approved for a 6% loan be better than not being approved for one at 4%?

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4 Choose and close

Finally, after you have negotiated with the lenders, you should choose the best offer that suits your needs and goals, and close the deal. You should review the offer carefully and make sure you understand and agree with all the terms and conditions. You should also ask for a written confirmation of the offer and a copy of the loan agreement. You should then sign the loan agreement and provide any additional documents or information that the lender requires. You should also pay any fees or charges that are due at closing, and receive the loan funds. You should then use the loan funds for your intended purposes, and start repaying the loan according to the agreement.

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5 Manage and monitor

Securing financing is not the end of the process, but rather the start of a long-term relationship with your lender. To ensure a smooth and successful loan experience, you should make timely and full payments, communicate with your lender, and track your progress. Paying your loan installments on time and in full will help you avoid any late fees, penalties, or negative impacts on your credit score. It will also help you build a good reputation and relationship with your lender. Keeping your lender informed of any changes or issues that may affect your loan performance or franchise performance is also important. Additionally, tracking your progress and performance against goals and projections, as well as comparing results to industry benchmarks and best practices, can help you make informed decisions and adjustments to optimize outcomes. Following these best practices can increase your chances of getting the financing you need on the terms you want for the purpose you intend.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Brandon Wilson, CFE

Tired of the Corporate Grind? Discover Business Ownership through Franchising
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Just because a specific franchise concept is "SBA Eligible" does not mean that every bank will want to underwrite it. This is where having a trusted funding consultant or firm that specializes in franchise funding is so valuable. These groups work with many lenders and know what type of concepts different lenders prefer. The Rollover for Business Startup (ROBS) option is another good option for people to use their qualified retirement funds to fund their franchise, penalty free and tax deferred. This option is especially attractive in higher interest rate environments like we are seeing today.

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What are the best practices and tips for securing financing from a franchisor or a third-party lender?

1

2

3

4

5

6

1 Understand your options

2 Prepare your documents

3 Compare and negotiate

4 Choose and close

5 Manage and monitor

6 Here’s what else to consider

Franchising

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What are the best practices and tips for securing financing from a franchisor or a third-party lender?

1

2

3

4

5

6

1 Understand your options

2 Prepare your documents

3 Compare and negotiate

4 Choose and close

5 Manage and monitor

6 Here’s what else to consider

Franchising

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