Owning a Franchise Can Be More Affordable Than You Think

By: Sara Wykes

The franchise industry may not be the first option that comes to mind when thinking about owning a business — but it has hidden advantages that include affordability and a powerful community of franchise owners ready to help newcomers.

Some franchise concepts, especially home-based or mobile brands, have relatively low entry fees, some as low as $10,000, but more commonly in the $25,000 to $50,000 range. Brands requiring more equipment, real estate, and staff will cost more to set up, resulting in higher initial expenses.

Initial fees will include an upfront franchise fee that grants the franchisee the right to use the franchisor’s trademark and operating system. Most franchisors require franchisees to pay an ongoing royalty, usually a percentage of total sales, which is often paid on a monthly basis. Franchisees also pay fees for advertising and marketing.

A potential franchisor is a good first stop. Ask them for recommendations. They may have agreements with lenders who may not only approve a loan, but will also shorten the process to help them open sooner. Some franchisors themselves will provide debt financing. Check for this in the Franchise Disclosure Document (FDD) or ask the franchisor directly. Reducing up-front costs will leave more money to keep the business going and growing. Many franchisors also offer discounts to veterans, minorities, and women.

Franchisors can also put business buyers in touch with another experienced source: franchisees. As part of due diligence, business buyers should meet franchisees in the franchise brand they’re considering. Ask them how they came up with the funds to get started. Ask if they could recommend any lending sources or advisors.

Help to answer questions about franchise purchase cost is available for free or at a relatively low cost from sources such as the Federal Trade Commission, franchise industry trade publications and web sites, and the International Franchise Association. Trade shows are another great opportunity to meet real live franchisors — and franchisees — for the price of admission, with no obligation or pressure.

Lending experts say that plenty of money is available for those with good credit, enough cash flow, and the patience to ride out a lengthy approval process. Just as they need a solid business plan, they also need a sound financing strategy. That strategy should include a list of several different sources of capital.

Before beginning the search for financial support, they should start with a thorough inventory of their financial situation, listing all of their assets and debts; how much they’ll be able to fund and how much they’ll need to borrow to survive until your cash flow turns positive; and be prepared to back up everything with reliable documentation.

Learn more about franchise financing in Franchising.com’s free Franchise Guide.