How to Finance a Franchise Purchase in the U.S.

A franchise purchase involves more than the initial franchise fee. Franchisors list estimated costs in the Franchise Disclosure Document, which every U.S. franchisor must provide before you sign. Item 7 of the document sets out the estimated initial investment: franchise fee, build-out, equipment, signage, inventory, training, deposits and working capital for the first months.

Read it carefully and plan to fund the high end of the range, not the low end.

Franchises are often easier to finance than independent start-ups, because the brand has a track record and lenders can compare your plan against other locations. Lenders usually examine the franchisor's performance and unit failure rate, your own experience and credit, your cash injection (the portion you contribute yourself), and your plan for the first months.

Expect to contribute a meaningful amount of your own money. A typical expectation is a down payment or cash injection, though the amount varies by lender and brand.

• SBA-backed loans: commonly used for franchise start-ups because of their long terms and relatively low payments. The SBA maintains a directory of franchise brands, and listed brands can make approval smoother. Processing takes longer than for other products.
• Term loans from banks or alternative lenders: faster, often with shorter terms and higher payments.
• Equipment financing: for kitchen equipment, vehicles and fixtures, keeping cash available for other costs.
• Franchisor financing or preferred lenders: some franchisors offer or arrange financing for part of the fee or build-out. Ask what is available and compare the terms with outside options.
• Personal sources: home equity or retirement funds are used by some owners, but carry personal risk and tax consequences. Take advice before using them.

Build a budget with four parts and match the financing to each:

1. Franchise fee and training: a term loan or SBA loan, or your own cash.
2. Build-out and leasehold improvements: a term loan, SBA loan or landlord allowance.
3. Equipment and fixtures: equipment financing.
4. Working capital: a line of credit or reserve covering the first three to six months.

Underfunding working capital is one of the most common reasons new franchisees struggle.

• Speak with several current and former franchisees, using the contact list in the disclosure document.
• Review the earnings claims, if any, and ask how they were calculated.
• Check litigation history and unit closures.
• Understand ongoing royalty and marketing fees, because they come out of revenue every month.
• Ask a lawyer and an accountant experienced with franchises to review the agreement.

• A business plan with projected sales, costs and break-even.
• The franchise disclosure document and the franchise agreement.
• Personal financial statement and credit reports.
• Your resume, showing relevant experience.
• Details of your cash injection and its source.
• Lease or letter of intent for the location.

Financing a franchise takes time: lender approval, site selection and construction all depend on each other. Start the conversation before you sign the franchise agreement, and compare more than one option. lendfloCapital helps owners compare term loans, equipment financing and working capital through one short application, with no cost to apply.