Best Franchise Financing Options

What are franchise loans?

Franchise financing is any form of borrowing you use to help you afford the costs of setting up or expanding a franchise business. Franchises are unique because they offer a much safer bet of success and profitability than setting up a new business, but in return you must meet strict guidelines.

How does franchise financing work?

In most cases, you’ll need to have significant assets and a positive net worth to purchase a franchise, though it does depend on the brand you’re buying into. For example, McDonald’s has high standards and expects anyone purchasing a franchise to have run businesses in the past, either as the owner or in a c-suite position, and for many locations, a 7-figure net worth. This means you’ll need to be in a strong position and then consider financing on top to make the process more affordable.

That said, many smaller franchises only require you to have the cash to get the franchise up and running, so you may decide to finance all your startup expenses or the purchase of a second franchise location. We’ll guide you through the different types of financing you can choose from shortly.

The Best Franchise Financing & Loan Options

1)    OnDeck

OnDeck offers fast funding online for small businesses and are often happy to lend to those with a slightly less than perfect credit score, provided their business is promising and ready to expand.

OnDeck

✔ Funding: Borrow $5,000 - $250,000
✔ Minimum Credit Score: 600
✔ Loan term: up to 36 months
✔ Funding turnaround: as soon as same business day

OnDeck offers fast business loan options such as term loans, business lines of credit, and SBA PPP loans and funding as fast as 24 hours. Minimum requirements include: at least 1 year in business, 600 credit score, $100,000 in gross annual revenue and a business checking account.

COMPARE LOANS

• Fixed APR from 9% (maximum is 99%, however)
• Minimum credit score: 600
• Minimum time in business: 1 year
• Minimum annual revenue: $100,000
• Provides short term loans of 3-36 months
• You can borrow $5,000 to $500,000
• Requires daily or weekly repayments, not monthly
• Less hoops to jump through than other options (though you need to have no history of bankruptcy within the past 2 years)
• Requires personal guarantee and business lien

2)    Funding Circle

Funding Circle is best for established businesses that are ready to expand or want to refinance debt. They typically fund accounts within 3 days of approval and offer better rates than many other lenders.

Funding Circle

✔ Funding: Borrow $25,000 to $200,000
✔ Minimum Credit Score: 700
✔ Loan term: 6-12 months
✔ Funding turnaround: 24-48 hours

Funding Circle offers affordable business loans with interest rates lower than alternative lenders with monthly repayment schedules for borrowers with good to excellent credit scores.

COMPARE LOANS

• APR from 12.18% (maximum is 36%)
• Minimum credit score: 660
• Minimum time in business: 2 years
• Minimum annual revenue: no requirement
• Requires personal guarantee and business lien
• Not available to businesses in Nevada
• Will not accept anyone with history of a bankruptcy in the last 7 years

3)    Apple Pie Capital

Apple Pie Capital is one of the best options because they work exclusively with franchises to match them to the right financial solution. They cover all types of funding from new locations to refinancing and acquisitions, with loan amounts starting at $100,000 (though their equipment financing loans start at $10,000).

Apple Pie Capital works with a variety of lenders, so interest rates and terms can vary significantly.

Types of franchise financing options

The franchise financing options available to you are:

• Term loans: term loans are traditional loans where you borrow a lump sum and pay it back over a term of months or years, usually with a monthly repayment. Term loans from online lenders offer fast funding, but interest rates can be high if your credit rating isn’t much over the minimum. You’ll need at least a credit score of 600 to apply and be willing to give a personal guarantee.
• SBA loans: SBA loans are guaranteed by the Small Business Administration, so offer some of the lowest rates and best terms available. To be eligible for an SBA loan for a franchise, it must be listed in the SBA’s Franchise Directory. There are two types of SBA loan that may be suitable, the 7(a) loan and the 504 loan.The 7(a) loan can be used to open new franchises so are particularly attractive, with repayment terms of up to 10 years and favorable interest rates, typically between 2.89% and 13%. You can borrow up to $5 million in the right circumstances. The downside to this type of loan is that it takes a long time to get approved (up to 12 weeks from the start of your application) and in many cases you will find your personal home is required to be collateral for the loan.The 504 loan is similar, but can be used for real estate and asset purchases exclusively. This isn’t generally a good choice for new franchises but can be an option if you’re expanding.
• Bank loans: if you have a good relationship with your bank or have used it for business loans in the past with success, you may be able to use a bank loan to finance your franchise.
• Franchisor Financing: In some cases, the company providing the franchise opportunity (the franchisor) offers some element of financing. This may be in the form of in-house financing or a preferred lender they like to work with. Make sure you compare any financing options here with what you can find from independent lenders to ensure you’re getting the best rates.
• Equipment Financing: If you’re looking for funding exclusively to buy equipment, you can look into equipment financing. This is where the value of the loan is secured by the equipment itself.
• Personal assets: if you have significant assets beyond that of the net worth requirements that can be liquidated in a timely fashion, you could look to those for financing. This may be savings, stocks and shares, collectables, real estate, and so on. It’s best to avoid using personal credit (such as remortgaging your home) as it will destabilize your current net worth and may put you at risk if the franchise isn’t as successful as you hope it will be.