While owning a franchise may be a good way for more people to become entrepreneurs, financing the franchise purchase isn't always easy. One of your first stops for potential financing should be your franchisor.Franchisor Financing: How It Works
Franchisors know they need to attract quality franchisees, but they also know that some franchises are simply too expensive for an average entrepreneur to pay for without a little help. That's why a number of franchisors do offer financing options.
Typically, two types of financing programs are available through franchisors. One - known as direct - has the franchisor handling the financing itself. With the second type, third-party lenders are used for the financing but you go through the franchisor.
Indirect financing is much more common today and is the one you're most likely to encounter. With this method, after you complete your application, the franchisor will connect you with a network of preferred lenders who are can assist you in getting a loan to cover the costs of your franchise. Because these banks work directly with your franchisor, the process is usually simpler.Things to Consider About Franchisor Financing
While getting financing through your franchisor will help you get closer to your dream, that doesn't mean you can finance everything. Typically, you will be expected to have 20% of the costs in hand. Financing will only cover the remaining 80%.
Also, many franchisors are not offering financing programs any more. Because of the current economic situation, fewer franchisors are going to be offering financing. The reason for this trend is that with more people looking to purchase franchises and with a greater need of businesses to bring in cash franchisors have less of an incentive to finance franchises.
Some franchisors may also have been scared out of the financing game by the bad experiences of other franchisors. In order to grow quickly, some franchisors over-extended themselves to finance new franchisees. As a result, they ended up destroying their businesses. Thankfully, most franchisors have learned from those mistakes and are now more careful about extending financing. While this may make it harder to find franchisors willing to offer financing, it also means you won't end up in a bad situation because of bad management either.Franchisor Financing & Interest Rates
A big question when considering franchisor franchising is how high the interest rates will be. Interest rates are usually determined by the lender and are based, in part, on your financial standing, including your credit score. A low credit score might mean you have to pay higher interest rates regardless of whether you go through your favorite bank or your franchisor's preferred lender.
Interest rates are something you should pay attention to. When those rates go up, you're going to end up paying more and that could be disastrous for your franchise dreams. If you know that you need financing for your franchise, then make sure to get started while the interest rates are still low. Otherwise, your franchise could end up being successful but most of your profits could get eaten up by your loan payments.
Remember, while franchisor financing is a possibility worth looking into, it's definitely not the only option available.