There’s no two ways around it: opening a franchise is a major investment. While some people can afford the out-of-pocket costs associated with franchise ownership, about 49% of prospective franchise owners expect to need a loan.

Wondering how to buy a franchise using a loan? Let’s take a closer look at what you need to know about franchise funding.

How Does Franchise Financing Work?

Don’t let the cost of opening a franchise discourage you from achieving your goals. Many franchise owners pursue franchise funding, and it may even come from multiple lenders.

To ensure franchise owners are in the right position to open a business, franchise brands will set minimum requirements for net worth and liquidity. Some will also set a minimum credit score, though that is becoming less common over time. Ensuring that you have certain liquid assets means that you’re able to meet your financial obligations while your business is not yet profitable.

If you meet the brand’s minimum requirements, franchises are generally comfortable with you pursuing franchise financing. Your franchisor has walked many other franchise owners through their franchise funding options, and they know the right questions to ask to determine the best one for your situation.

Many franchisors have a list of trusted third-party lenders, and they’ll be happy to connect you with them. If you have questions at any point during the loan approval process, feel free to share them with the home office team. They want you to succeed.

Preparing to Meet with Lenders

While the specifics depend on the kind of loan you’re pursuing, you should expect a lender to request the following documents:

• Personal information, including your date of birth and Social Security number
• One year of personal bank statements
• Three most recent years of personal and business tax returns
• Franchise agreement
• Articles of incorporation
• Employer Identification Number
• Business plan
• Commercial lease agreement, if applicable
• Projected balance sheets
• Cash flow statement
• List of current accounts receivable
• Valuation of collateral, if applicable

If you are applying for a Small Business Administration (SBA) loan, you will also need to fill out a number of government forms.

Different Franchise Funding Options

SBA Loan

SBA loans are guaranteed in part by the federal government. They’ve grown popular among franchise owners because their repayment terms tend to be more favorable than commercial loans. Most owners opt for the Type 7 (a) loan; qualified veterans are eligible for a special program called the M5 loan. Keep in mind that SBA loans are tied directly to the Federal Reserve’s prime rate and their interest rates can run high.

Home Equity Loan

If you own your home, you can start your business with a home equity loan or home equity line of credit (HELOC). With a home equity loan, you’ll receive a lump sum of cash at a fixed interest rate. HELOCs allow you to withdraw funds as you need them. While a HELOC has smaller monthly payments to start, the payments grow higher over time and the interest rate is variable.

Retirement Rollover

Borrowing from your retirement account is possible, but inadvisable. IRA loans are not allowed. You can borrow from it for 60 days, but you’ll need to either restore the funds or roll them into another account to avoid penalties and taxation.

Other Kinds of Franchise Financing

Some franchises, including Home Franchise Concepts, offer in-house franchise financing for qualified candidates. We proudly offer a number of franchise funding options, including financing with your 401(k). Your franchise advisor will share more specifics with you if you’re interested.

Home Franchise Concepts Makes Franchise Funding Simple

Take the guesswork out of franchise financing by partnering with an industry leader. Home Franchise Concepts gives our franchise owners all the tools and resources they need to grow a thriving business.

Submit your franchise inquiry form today to start a conversation.