4 Essential Franchise Financing Steps and Tips

So you want to start a franchise? Out of the immense amount of franchises to pick from, picking the franchise that will work best for you and your location is vital. There are many factors to consider when opening a franchise, financing being the biggest obstacle. Here are some key steps when it comes to properly financing your franchise:

1. Finding the right franchise opportunity

The main question to ask yourself is, what do you ultimately want to achieve as a franchise business owner? What are your goals? The best way to set your goals and assess franchise opportunities is to pick something you really enjoy or something you are particularly good at doing.  Once you have figured out the industry where your skill set will benefit the most, then evaluate different franchise opportunities to see which would be the best fit. Consider picking a franchise that has a long track record of success, so that a lender will be more prone to help with financing.

2. Evaluate & Research The Franchise

After you have found the franchise you wish to invest in, it’s time for some extensive research. You are devoting a lot of time and money into this business, so any prior analysis is extremely important for making sure you are making the right investment. Next, contact the company and request franchise information including the companies history, how they have performed in the economy in the past and how will they perform in future years to come. Also, carefully review the Franchisor Disclosure Document (FDD). Don’t hesitate to ask any questions about the information and data you have received. The whole point of researching the franchise is to make sure you are making a wise investment decision.

3. What are your Funding Options?

Before looking into loan options, make sure you check as to what sort of financing the franchisor provides, if any.  After determining the amount you will receive from the franchisor, research other options to help finance the rest of your business including:

  • Home Equity
  • Personal Savings
  • Family, Friends, or Business Partner
  • Retirement Fund/401K
  • Conventional Loan

4. How To Prepare

Now that you have picked a financing option that will best fit the needs for your new business, you must prepare a Business Plan and Loan Package for your targeted lender.

• Your business plan should consist of: a summary of your proposed business, products and services offered, marketing strategy, other competition, and A cost analysis which will break down the sources and uses of proceeds.  Also, a pro-forma opening balance sheet should be included along with a pro-forma profit and loss statement for 3 years with the first year P&L broken down monthly.

• Your loan package should consist of: A loan application, the business plan, your personal credit score (within the last 90 days), your personal financial statement (dated within the last 90 days), copies of 3 years personal tax returns.  If purchasing real estate or other goods; prior appraisals, photos, invoices or any other material that will help a lender understand the collateral included in the transaction

Having an organized business plan and loan package to present to a lender is the best way to make a strong first impression. This will give a lender the feeling that they are making a worthwhile investment with you and your pursued franchise.

Lastly, when looking for loan opportunities make it a point to target lenders who specialize in or are familiar with Franchise Lending.

Help with writing up a business plan from SBA.gov

Entrepreneur.com’s 2013 Top Franchise Opportunities

Business Loan Package Checklist (PDF)

Prime’s Franchise Financing

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