by Brad Mix | May 02, 2023
When it comes to buying a franchise, one of the biggest challenges is securing financing. Fortunately, there are several options available to potential franchisees. Let’s take a closer look at the following options and others that may be available to you:
- SBA Loans
- Banks with Franchise Lending Divisions or Programs
- Rollovers for Business Start-ups (ROBS)
- Specialty Finance Lenders
- Friends and family
SBA loans are one of the most popular financing options for franchisees. The U.S. Small Business Administration (SBA) works with approved lenders to provide financing for small businesses, including franchises. SBA loans typically have lower interest rates and longer repayment terms than other types of loans. SBA loans are partially guaranteed by the government, which can make them easier to qualify for than traditional bank loans. To qualify for an SBA loan, a franchisee must typically have a credit score of at least 680 and be able to provide a down payment of at least 10% for real estate and 20% for franchise acquisitions.
Banks with Franchise Lending Divisions or Programs
Several banks and other lenders offer financing specifically for franchises, either through a dedicated division or special program. Some of the main ones include:
- Wells Fargo: Franchise Services division that specializes in lending to franchisees. They offer a range of financing options, including loans, lines of credit, and equipment financing.
- Bank of America: Franchise Financing program provides loans and lines of credit to franchisees. They also offer industry-specific expertise and resources to help franchisees succeed.
- TD Bank: Franchise Finance group offers financing to new and existing franchisees, including loans and lines of credit. They have experience working with a wide range of franchise brands.
- Huntington Bank: Franchise Finance group provides financing to help franchisees acquire or expand their businesses. They offer a variety of loan products and customized financing solutions.
- Live Oak Bank: Specializes in lending to small businesses, including franchisees. They offer a range of financing options, including loans for real estate, equipment, and working capital.
It’s important to note that this list is not exhaustive and that franchise financing options may vary by lender and by franchise brand. It’s important for franchisees to do their research and compare options to find the best financing solution for their needs.
Rollovers as Business Startups (ROBS)
ROBS, or Rollovers as Business Startups, is another financing option for franchisees. ROBS allows a prospective franchisee to use funds from their retirement account, such as a 401(k), to finance the purchase of a franchise without incurring early withdrawal penalties or taxes. The funds are rolled over into a C Corporation. One benefit of using the ROBS arrangement is that it can help to avoid taking on debt to finance the franchise purchase. This can be especially appealing to those who may not qualify for traditional bank loans or SBA loans. To perform a ROBS, it is recommended that a perspective franchisee use a company that specializes in ROBS. While there are many companies that provide ROBS services, some of the main ones include:
- Guidant Financial: Leading provider of ROBS services, with over 20 years of experience in the industry.
- Benetrends Financial: Has been providing ROBS financing since 1983 and has helped over 15,000 entrepreneurs fund their businesses.
- My Solo 401k Financial: This company provides ROBS and other retirement account funding options to small business owners and entrepreneurs.
- FranFund: Offers a variety of financing options for franchisees, including ROBS, and has helped thousands of entrepreneurs fund their businesses.
- Tenet Financial Group: Provides a range of funding options, including ROBS, to help entrepreneurs start or purchase a business.
It’s important to note that while ROBS can be a viable financing option for some entrepreneurs, it’s important to work with a reputable and experienced provider to ensure compliance with IRS regulations and avoid potential legal and financial risks. While ROBS can be an excellent way to finance your franchise, it’s important to be aware of the potential risks. If your business fails, you could lose your retirement savings. Additionally, the IRS has specific rules and regulations that must be followed when setting up a ROBS arrangement.
Specialty Finance Lenders
Specialty finance lenders for franchises are financial institutions that specialize in providing loans and other financing products to franchisees. These lenders have in-depth knowledge of the franchise industry and understand the unique needs and can help guide you through the financing process. There are several alternative lenders that specialize in franchise financing. Some of the leading specialty finance lenders in the franchise industry include:
- Apple Pie Capital: A non-bank lender that focuses exclusively on financing for franchisees. They work with over 50 franchisors and has provided over $1 billion in franchise financing to date. They are a recommended lender by a number of popular franchises.
- FranFund: A lender that specializes in financing solutions for franchise businesses. They offer a range of financing options, including 401(k) rollover funding, SBA loans, and conventional loans. They also offer a unique program called the FranFund Express Funding Program, which provides fast access to capital for franchisees.
- BoeFly: An online marketplace that connects franchisees with lenders who specialize in franchise financing. They offer a range of financing options and can help franchisees find the right lender for their needs.
Friends and Family
Financing from friends and family is another option for franchisees. This option can be less formal than traditional loans and may offer more flexibility in terms of repayment. However, it is important to approach this option with caution. Mixing business and personal relationships can be risky, and it is important to have a clear agreement in place before accepting financing from friends or family.
Overall, buying a franchise can be an excellent way to become a business owner but securing financing can be a challenge. Fortunately, there are several options available to franchisees, including SBA loans, Banks with Franchise Lending Divisions or Programs, ROBS, Specialty Finance Lenders, and financing from friends and family.
Brad MixConsultants, Growth Acceleration Consultants, Manatee, Mix, Sarasota
Florida SBDC at USF
Specialty: Capital Access, Startup
Brad Mix has more than 20 years of experience in the financial services industry and as a business consultant. Prior to joining the Florida SBDC at USF, Mix provided consulting services to more than 2,500 businesses and assisted business owners in securing more than $100 million in capital and $60 million in government contracts. He has extensive experience with SBA loans, including 504s, Community Advantage loans, and microloans. In addition, he assists business owners in preparing business plans, financial projections, profitability improvement, business acquisitions, business valuations, marketing and capital solutions. He joined the Florida SBDC at USF in April 2020, after spending 20 years as a consultant and satellite manager for the Coachella Valley SBDC, located in Palm Springs, Ca. In 2005, he was awarded the California State Star Award by the California SBDC Network. He is a certified Associate Business Continuity Professional (ABCP).