Many franchisors offer franchisee financing in one form or another. The type and amount varies between franchisors.
Why do franchisors offer financing?
Typically, the franchisor is either looking for ways to accelerate growth or at times may wish to help bring on more qualified franchisees. In particular types of industries such as hotels or restaurants, the startup costs are quite hefty; therefore it is difficult to find the best franchisee with enough capital to run the outlet. Another reason that franchisors offer financing is to increase their units more rapidly in order to generate additional income for general advertising expenses.How do franchisors offer financing?
Direct financing - Franchisors offer financing in two different ways. One is known as direct financing in which the franchisor finances the franchisee himself. In some cases, the franchisor does not obtain any upfront cash from the franchisee. This is very rare but does happen occasionally.Third party financing - The other type is indirect financing in which a third party is actually offering the funding. In this case, franchisees are filtered to particular lenders. Usually there is some protection for the lender within the contract if the franchisee doesn't perform up to expectations. Some examples may be SBA financing or financing from a bank that the franchisor already has a relationship with.
The Process
The process for obtaining franchisor financing is typically very similar to the procedure you follow when applying for any other type of funding. A business plan is necessary in order for the lender to see documentation on how you plan to run the business and how much collateral you have. In other words, how much risk are they taking with lending you the money?Additionally, the franchisor will usually loan you a percentage of what you need to get the franchise started; this can range anywhere between 10 and 75 percent. Only in very rare cases would a franchisor fund 100 percent. Banks and other financial institutions typically require you to provide a portion of the funding as well.
In general, the availability of franchisor financing depends largely on the economic cycle at the time. The abundance of qualified people to run the franchises can have an effect on how much financing franchisors are willing and able to offer.
