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How to fund your franchise purchase

Posted On: March 8, 2018 author Paul Kendall

Have you ever wanted to run and own your own Franchise operation? Franchise purchasing can be an exciting time for many business owners. From first time franchisees to experienced business owners that have been in the game for years or decades building wealth through owning franchises, there’s always a certain level of uncertainty that comes with the territory.

With so many different elements to owning a franchise, it can be overwhelming at first to know where to start. With enough research, you can be prepared enough to finally purchase and run your very own franchise.

One important element for every franchise owner that needs to be taken into consideration is how you’re going to go about purchasing the franchise. Especially if you’re just starting out, most people won’t have the necessary funds on day one to purchase a franchise and have everything that’s required to fully equip the franchise. Most business owners structure the equipment acquisition in such a way to lower the total cost ownership through Franchise Equipment Leasing.

Today we’ll explore the various franchise purchasing methods available to most future franchise owners looking to finance franchise equipment.

Franchise Loans from Commercial Banks

 

It’s not uncommon for commercial banks to fund a franchise and is often the best option for the best bang-for-your-buck. Generally speaking, franchise loans from a bank will have the best rates, but may also be the most difficult to acquire.

Commercial banks typically have higher requirements for business owners and franchisees before they’ll provide you with any funding.

For one, they’ll require a certain amount of paperwork and financial data before considering you for any kind of lending:

 

  • Personal financial statements
  • Copies of tax returns
  • Verification of your down payment
  • And more

 

Unless you're wealthy or have a connection at your local bank. Your local commercial bank is going to want you to be over two years in business to get a business loan with a local bank. 

 

On top of that, banks will typically only consider applications for a franchise loan if you meet certain financial requirements. For example, your personal credit rating will need to be fairly high to be considered, Local banks are looking for a 680 fico or greater with 5 credit grantor trade lines with a history of 5 years for each one and you still may have to make a down payment of 10-20% or provide additional collateral. 

Equipment Leasing for Franchises

 

Another option for franchise owners (whether you’re opening your first franchise or expanding) is to utilize equipment leasing. Many franchises require some kind of equipment in order to operate on a daily basis.

It’s not uncommon for franchises especially to require specific kinds of equipment, and many times all the equipment can be fairly expensive when just starting out.

With equipment leasing, you’ll be able to split up where your funding comes from, which can have some benefits, especially for newer franchisees. For example, some banks may not be willing to give you the full amount of funding you’re asking for, but may consider providing a smaller loan to help you get started.

If you’re only able to secure a smaller loan from a bank, you can cover equipment related expenses of your business through equipment leasing, which is like a loan but specified for your franchise’s equipment.

As a business owner you can structure your equipment lease as a tax lease or a non Tax lease. With a non tax lease ($1 buyout lease, EFA agreement) business owners presume ownership at the end of the agreement. Franchise equipment financing enables business owners  too utilize Section 179 tax code where franchisees can accelerate depreciation and write off the entire purchase price in year 1 off their taxable income, or they can depreciate the asset over its useful life and take a small tax break each year.

With a tax lease franchisees can write off 100% of their monthly payments off their taxable income each year. This will give you the biggest tax write off year after year as long as you're leasing equipment. At the end of the term you can renew the equipment lease, negotiate a final cash payment with the lessor or return the equipment and upgrade to the latest and greatest equipment. 

When you goto lease franchise equipment, you're typically asked to put first and last monthly payments up front with the signing of the lease agreement. There are equipment leasing programs out there that offer no payments due up front and programs that offer deferred payments to delay your actual payments to give the franchisees time to ramp up with there business before their actual regular payments begin. 

Small Business Loans

 

The Small Business Administration (SBA) offers loans that are partly guaranteed by the U.S. government, making them a less risky deal to take. As a franchise, you’ll be looking for a loan known as the “7(a)”, which is issued by a lender that has been qualified.

SBA loans, like a loan from a commercial bank, can be one of the best options financially, however they can likewise be difficult to obtain. Not only are the requirements high, but the time investment required to get an SBA loan can be quite long.

This means that SBA loans are often only an option for future franchise owners that are able to wait to open their doors, or have prepared several months in advance. 

Internal Franchise Financing

Depending on the franchise you are attempting to open, you can contact the corporation directly to ask about financing options available. In some cases, it’s possible that they will also provide financing options directly and keep the debt on their books, similar to those from a bank or equipment financier. If not, Most likely they've worked with a lender or two in the past.

While financing rates may be high through internal financing at a franchise, you may not also be expected to provide the same kind of financial investment upfront (e.g., down payment, collateral, etc.). This can be an attractive option for franchise owners that may not have a lot of experience yet, but still want to have financial backing from the company they are opening a franchise from.

Make The Right Decision

When choosing your financial partner, their terms and policies must be appropriate to your business. Make sure to study their programs carefully and determine if it suits your budget. Only borrow the amount of money that you think your business can repay. Avoid getting too much because debt is the number one reason why many businesses end up in bankruptcy.

Aside from the money related matters, also consider the process of getting an approval. If you immediately need the money, avoid companies that require a lot of information and have a long list of required documents. They usually talk in circles and you’ll still end up being denied in the end.

However, among the leasing companies that offer franchise equipment leasing comes Trust Capital, LLC The process for applying will only take a minute or two because they have a one-page application on their website. Trust Capital USA can also approve your application within 24 hours.

Trust Capital has everything you’re looking for in a finance company… and more.  They will help you gain a faster return on investment, provide affordable working capital loans, and even introduce you to trusted vendors! Franchise Equipment Leasing by Trust Capital doesn’t require any down payment which also helps you save on working capital for your business. You can acquire the loan within hours after your application's approved and get an approval even if you have bad credit.

All you need is to visit their website and apply. Trust Capital will offer an equipment leasing quote subject to credit approval for your budgeting purposes. 

 

Final thoughts on how to fund your Franchise

In the end, franchise purchasing comes down to how good your personal financials are, how much cash you have on hand, your success rate with other businesses and franchises, and how committed you are to getting your franchise up and running. Many times new business owners are taking out a bucket of personal loans, friend loans and using there credit cards to get going.

 To schedule a meeting with a Franchise Loan specialist call Toll Free 866-458-4777

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