Opening a franchise is a good option if you want to run a business but don’t have a unique product or service of your own to sell. However, it can cost a pretty penny to invest in a well-known brand and open up your own branch. If you’re ready to take the plunge but don’t have deep pockets, consider some of these franchising-funding options.
The customary means of borrowing money is still the most popular one among your fellow franchisees. According to Teddy Nykiel and Jackie Zimmermann of NerdWallet, you’re 15 percent more likely than other types of business owners to seek out a lending institution for a loan. It doesn’t hurt that lenders are more likely to support new franchise locations of a proven brand than a new enterprise with a fresh, untested business plan.
You might have a better chance getting a loan to open a franchise, but that doesn’t mean your finances are exempt from consideration. Before you sit down with a loan officer, make sure you have all of your relevant financial records at hand. Marco Carbajo wrote for The Balance Small Business in 2018 that regardless of how popular your franchise is, you still need to meet the conditions of the institution’s underwriting and lending policies. This includes a tough look at your credit score and net worth and possibly providing collateral to secure to the cash you need.
Friends and family
While a loan is the more typical road to franchising money, it’s not the only option. If you have a large network of friends, business acquaintances and family, they could help lay down the cash for your dream. While it sounds like an easy option, Martin Zwilling, founder and CEO of Startup Professionals and contributor to Inc., warns that you should be just as prepared to talk to the people you care about as you would professional investors. This includes knowing how much you’re asking for, how long it will take to repay them and coming prepared with a prototype or other demonstration of your hard work before you asked for the money.
Asking the people you already know for money sounds like a more informal process than approaching other investors or lenders, but Zwilling cautions that you should both sign an agreement document with specific terms. Not only does this lay out how you will reimburse your loved ones for their generosity, but it also makes the rules of the arrangement crystal clear. The document will protect your relationships from breaking apart over a disagreement about money in case you interpreted verbal comments differently.
If you’re willing to work with another person, a business partnership is another way to raise the funds you need to buy a franchise. A business partner might have the credit score or personal connections you lack to get money for your initial investment, or they may simply have the cash themselves. Partnerships can range from an equal associate who runs the business alongside you to a silent associate who provides funds but lets you take control.
Like with money from family and friends, Eddy Goldberg with Franchising.com says that any form of partnership needs an agreement “that clearly spells out, in writing, an exit strategy in case things don’t work out as planned (or hoped for).” This document should also contain options for if one partner wants to buy out the other or contingency plans for unexpected medical conditions or partner death.
Opening a franchise is a great way to run your own business with all the help of a bigger brand, but it comes with some hefty starting costs. Before you make any permanent decisions, make sure to consult with a financial advisor.