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Franchise Financing

The key to a productive and profitable franchise investment is to develop a well-thought out franchise financing plan. You must consider the time and financial commitment you're willing and able to devote, study franchise disclosure documents, and secure financing for your future investment. The Franchise Guy will help you to determine the viability of a franchise based on their financial statements and develop a budget for your entire operation and living expenses (experts recommend that you cover your entire operating expenses for your first year and living expenses for your first two years).

The Cost
Your initial investment to start a small business franchise begins with a licensing fee and operating costs, including royalties, leasing, legal fees, equipment, inventory, staff and insurance. Ongoing expenses after starting a franchise may include continuing royalty payments - based on a portion of your weekly or monthly gross earnings, and advertising fees - for local and national promotional efforts.

Securing Financing
The good news is that securing financing for a franchise may be much easier than securing financing for an independently owned business because a franchise has the benefit of name recognition and demonstrated success that lenders know and trust. In addition to the traditional means to secure franchise financing , there are several franchise-friendly finance options offered by organizations such as the Small Business Administration (SBA) and the IRS.

•  The SBA loan program is especially targeted (but not limited to) people who cannot obtain franchise financing through traditional lending methods. The SBA will help you secure a loan to start a franchise with the SBA guarantee, through Certified Lenders or Preferred Lenders. Additional information is available at

•  An IRS-approved method allows you to invest your 401k or IRA into a franchised business without penalty, taxes or loan repayment. Now you can access your hard-earned money without consequence and avoid lengthy loan applications for loans that must be repaid with interest. Additional information is available at

Sources of Financing
Your best source of franchise financing information is the franchisor.  They have guided others in their system and can readily assist in presenting alternatives.  The most common sources of funds are family, friends, savings, home equity lines of credit, SBA bank loans, and retirement funds (no penalty).

Financial History
One of the most important steps in measuring your potential for success is to study the Uniform Franchise Offering Circular (UFOC) of the franchise you're considering. The FTC's Franchise Rule requires that you receive the UFOC (a disclosure document of financial status) before signing with a franchise. Review of the disclosure document will explain the company's financial stability and exactly how much you will be expected to pay in initial and ongoing expenses.

Additional Resources
Starting a franchise requires great attention to detail and a thorough investigation into the company you wish to work with - but where should you begin?

  • The disclosure document holds the key to the company's financial past, present and future - which is why you should always have an accountant review these papers with you to determine financial growth and to create your own franchise financing plan.
  • Contact an Attorney - Contracts may be tedious and difficult to follow but it's imperative that you understand what you're signing - have a lawyer examine every document to avoid unexpected surprises.
  • Financial institutions can access a number of specialized financial reports to provide an unbiased opinion of the franchise opportunity.
  • The Better Business Bureau is an excellent source to learn about the business practices of the franchisor.
Please contact us for more information about how to finance a small business franchise!

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