How to Finance a Franchise: Your Guide to Buying a Franchise

If you’ve been thinking about starting your own franchise business, one of the big questions you may have is how to finance it. If that is the case, you’re not alone. In fact, the fear of being unable to obtain enough financing is one of the biggest hurdles to business ownership. If the question of “How do I finance a franchise?” has held you back, here’s the good news: there are more options out there than you might think!  The reality is that for independent businesses, there are many financing options available, with some specifically designed to help you achieve your dream. 

At Neighborly®, we specialize in helping people like you become successful business owners. For that reason, we’ve put together this guide, which will walk you through the most popular and effective franchise financing options available today. With this key information, you can confidently take your first step toward business ownership. 

What is a Franchise And What Advantages Are There to Investing in One? 

Before diving into the numbers, let’s take it back one step. First, what is a franchise, and what advantages are there to investing in one? A franchise is a business model that allows you to operate your own location of an already established brand. Instead of building everything from scratch, you’re buying into a proven system with training and support, proven processes, and instant brand recognition. Franchise systems provide a structured approach to operations and growth, helping ensure consistency and efficiency across all locations. 

Franchise businesses typically feature several attractive qualities when compared to independent startups. Franchises are built on the support and name recognition they start out with, not to mention access to a wealth of other business resources, from professional marketing materials to a nationwide network of other franchise business owners. You can imagine how much of a competitive advantage that provides from day one!  

With Neighborly, you get the full backing of an experienced franchisor, professional team, and a network of fellow franchise owners, all of whom want to see you succeed. The franchisor's system is essential in supporting your daily operations, which adds significant value to your business. That alone could be the key to your long-term success, while others around you may struggle to get off the ground. Check out our Franchising 101 page to learn more about what we offer. 

How to Buy a Franchise Business: First Steps 

According to one survey, 42% of small business owners admit they had limited or no financial literacy before starting their businesses. While financing is a key part of buying a franchise business, it doesn’t have to be daunting. Here are a few more of the key steps you’ll need to take to get ready for franchise business ownership:  

STEP #1: Estimate Startup Costs 

Before you pursue financing, you’ll first need to estimate the full cost of getting your franchise off the ground. This includes the franchise fee, equipment, licensing, marketing, insurance, and initial inventory - just for starters. Don’t forget to factor in working capital to cover day-to-day expenses during the early months. To learn more, visit our Franchise Cost and Qualifications page. 

STEP #2: Build a Business Plan 

Almost all lenders will want to see a solid business plan before approving your application. The good news is that a quality franchisor will help you with your business plan, making financing just that much easier. In general, a well-crafted business plan outlines your goals, target market, marketing strategy, projected revenue, and expenses. 

STEP #3: Review Your Personal Finances 

Another key step is to take a close look at your current financial situation. If you haven’t already, look into your credit score, savings, available assets, and any outstanding debts. This helps determine what types of financing you may qualify for and how much you can afford to invest personally. 

STEP #4: Explore Financing Options 

Once you know your total costs and current financial standing, it’s a great time to begin exploring your funding options. There are quite a few available, and each option has its own benefits, eligibility criteria, and risk level. 

When purchasing a franchise, it’s important to understand the total investment required, including significant costs such as the initial franchise fee, the ongoing royalty fee that the franchise owner pays, and the need to buy equipment. Review the Franchise Agreement and all related attachments carefully, as these contracts outline your obligations, duration, and renewal terms.  

You may choose to buy an existing business or open a new outlet, each with its own approval process for site selection and design standards. Investors and financial institutions can help you secure a franchise loan, but you’ll need to demonstrate your financial qualifications. The process of purchasing a franchise involves evaluating whether the opportunity is profitable, understanding potential profit and average income, and considering low-cost options. Always review the Franchise Disclosure Document (FDD) carefully and remember that new businesses often face higher risks compared to established franchises. 

How to Finance a Franchise: 5 Smart Financing Options 

So, how can (or should) you fund your franchise business dream? Whether you're just starting out as an entrepreneur or transitioning from another career, here are five smart financing methods to explore: 

1) SBA Loans 

Small Business Administration (SBA) loans are government-backed loans specifically designed to finance small businesses. These loans typically offer lower down payments (sometimes as low as 10%) and favorable terms when compared to traditional bank loans. While these loans require a good credit score and a solid business plan, they are generally easier to qualify for than bank loans. Along with financing, the SBA also provides mentoring and educational resources that can help borrowers succeed 

Visit SBA.gov for more information on current programs and requirements. 

2) Conventional Bank Loans 

If you have strong credit and good overall financial health, traditional bank loans can also be a good option. While bank loans are more difficult to qualify for than SBA or other types of loans (they often require collateral as well as a high credit score), they may offer competitive rates and flexibility. 

For more insights, check out this article.  

3) 401(k) Rollovers for Business Start-ups (ROBS) 

One of the lesser-known financing options is Rollovers as Business Start-ups, or ROBS. This strategy is where you use retirement funds (like a 401(k) or IRA account) without paying early withdrawal penalties or taxes. ROBS can be a great option for new business owners who have a lot of retirement savings and/or those who want to avoid debt. Unlike loans, ROBS doesn’t involve borrowing money, so there are no monthly payments, no interest, and no added debt burden. 

This financing option may be ideal for many new business owners, especially those switching careers at or after midlife. Learn more about ROBS financing in this helpful article. 

4) Home Equity Loans or HELOCs 

If you own a home and owe less than it is currently worth, you may be able to tap that equity to finance your new franchise business. In fact, a Home Equity Loan or Home Equity Line of Credit (HELOC) could provide the capital you need to get started. While this type of loan is secured by your home and involves some risk, for some entrepreneurs, it may be the most effective way to secure the financing you need. In some cases, it can be easier to obtain funding secured by assets than other types of loans. 

5) Alternative Online Lenders 

The last smart option on our list is alternative funding. For example, there are many online lenders who offer quick access to funds, even if your credit isn’t perfect. These loans usually come with higher interest rates, but they’re easier to qualify for and can be funded relatively quickly. In fact, according to ADP, alternative lending has become an increasingly popular choice for small business financing, especially among new entrepreneurs. 

How to Choose the Right Financing Strategy for You 

Knowing the smart financing options available to you goes a long way toward overcoming one of the key hurdles to franchise business ownership. But which one is right for you? 

Ultimately, the right financing method depends on your unique situation. This makes an honest inventory of your credit and finances so important. As you weigh your options, be sure to consider: 

• Available assets and savings 
• Personal risk tolerance and comfort with debt 
• Long-term business goals 
• Additional resources are available through your franchisor

For a deeper dive into how to choose a financing option, check out our Financing a Franchise 101 Webinar for a helpful breakdown.