How to Finance a Franchise

If you are a business owner trying to franchise you probably have concerns about how to cover the cost of franchising. You have three main options when considering how to finance a franchise: traditional business finance, Small Business Administration loans, and crowdfunding. Each method has various benefits and drawbacks. As a business owner, you are responsible for deciding which obligations and payments you and your business can fulfill.

Traditional business finance involves two types of capital acquisition: bank loans and venture capitalism. Bank loans are a fast way to access the funds necessary to start a franchise, but these loans have extremely high-interest rates. Venture capitalism, meanwhile, often forces business owners to outsource decision-making power to an investor. Private deals involving venture capitalism are usually easier to repay. Venture capitalism, however, is harder to come by, as finding an investor willing to finance an entire franchise is extremely difficult.

One way to acquire funds via a bank loan without high-interest rates is to collect a loan through the Small Business Administration. An SBA loan is a small business loan partially guaranteed by the United States government, lowering the risk for banks and other lending institutions. The SBA works with a network of financial institutions that lend money to small businesses more frequently and with better terms. If a business is unable to repay the entirety of its loan, the SBA will cover its guaranteed portion. The SBA can guarantee up to 85 percent of a loan. SBA loans, while effective, are often difficult for which to qualify and have complicated paperwork which can take about three weeks to formulate.

Crowdfunding is another effective way to fund a business. Posting an offering online via a broker-dealer website allows you to access a multitude of enthusiastic investors, both accredited and non-accredited. Crowdfunding helps business owners avoid high-interest rates and maintain control of their business. Formulating an offering can be expensive based on the type of securities your business can sell, but crowdfunding is still more affordable than most bank loans and is more practical than venture capitalism. Repaying one’s investors is more manageable with crowdfunding, as many investment amounts are smaller, and investors are more willing to endure some risk than most banks.

You as a business owner have options to fund your franchise goals. Crowdfunding and SBA loans are more feasible for most businesses in today’s climate, but many businesses have succeeded for decades using traditional business finance options. You must evaluate how much capital you need and what you and your business are capable of repaying.

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