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Running a Franchise: Loans & Financing Options | L3

The Complete Guide to Franchise Funding

Starting a business from scratch is a highly challenging endeavor, yet building a recognizable brand from nothing is even more difficult. Running a franchise gives you access to a known brand’s trademarks, knowledge, processes, and name.

Brands from fast food to pest control have jumped into the franchising industry to expand their reach and boost their profiles rapidly. In fact, it’s estimated that the U.S. has 750,000 franchise businesses alone.

Today, we’re going to discuss how franchise business loans work and how to get a franchise loan.

What are Franchise Loans?

Franchises can do a lot for anyone who wants to start a new venture under their banner, but it’s crucial to develop a plan for financing a franchise.

The initial cost is paying the startup and licensing fee. These charges depend on the franchise, with more prominent brand names, such as McDonald’s, charging more than those who haven’t been in the business for long.

Franchise costs can range from a few thousand dollars to a few million dollars. Beyond the initial startup fees, you’ll likely have to pay ongoing fees to maintain control of your franchise. Entrepreneurs with little starting capital can obtain specialized franchise financing to cover these costs.

These loans work in much the same way as any other loan. You receive a lump sum and make regular monthly repayments until you’ve paid the loan off. These loans may be used for any associated business expenses.

Generally, financing a franchise will require you to put up at least 10-30% of the money from your personal funds. Lenders want to see that you’ve got some skin in the game.

Common Costs of Running a Franchise

With few limits on what you can spend the money on, what are the typical costs you’ll likely encounter when running a franchise?

Franchises put strict limits on business location, activities, prices, etc. Before committing to any one franchise, you’ll be able to receive an estimate on your build-out costs.

  • Franchise Fees – Franchising fees are the largest cost you incur during your first year. These commonly cost tens of thousands of dollars because you’re essentially renting the brand. A loan for a franchise can cover these fees and may also cover any ongoing license fees.
  • BuildOut Costs – Your build-out costs will vary depending on your business. For example, a mobile hotdog van or a pest control business will see few build-out costs. A new fast food outlet, on the other hand, will require all the equipment, fixtures, and fittings.
  • Working Capital – Most franchises will also provide detailed information on the amount of working capital required to keep your new business moving. A franchise loan can ensure you have the liquidity to maintain your business’s activities.
  • Supplies – Your basic supplies will be a regular ongoing cost. Again, the supplies and their cost will vary depending on the business. For example, a restaurant will need food, plates, cutlery, and napkins.
  • Inventory – Franchises will often stipulate a minimum amount of inventory to get started. Running a store may mean spending anything from $20,000 to $150,000 in stock to get moving.

As you can see, the costs of running a franchise go well beyond the franchising fees themselves. You’ll need a considerable amount of franchise funding to start all but the most minor franchises.

These are only a basic overview of costs. More formalized franchising programs may even require you to attend a training camp, which, again, can lead to you incurring travel and living expenses.

Types of Franchise Financing

There are lots of franchise funding options available, which means you need to weigh up your options and consider whether they fit your business plan. The right franchise loan can make your business, and the wrong one can break it. It’s essential to consider several options for franchise funds first.

Here are the main types of financing available to you.

U.S. Small Business Administration (SBA) Loans

SBA franchise loans cover up to 85% of a business’s loan amount. These loans are designed for small businesses to get off the ground. Although the SBA doesn’t offer financing itself, it works with banks, credit unions, and other lenders across the nation. They guarantee the loan, so lenders are more willing to support small business owners.

The security offered to borrowers and lenders is beneficial for both parties, making SBA franchise loans among the most helpful loan types in the country.

The best part is that you only need a minimum 500 FICO score, which is considerably lower than other lenders. You can also lend anything from $30,000 to $5,000,000. With no minimum monthly revenue requirements and payback periods up to 25 years, you’ve already got your business off on the right foot if you can obtain an SBA loan.

Startup Business Loans

Unfortunately, your franchise financing options are considerably more limited when starting a business from nothing. Startup business loans are an option if you’re searching for alternatives to fund your franchise.

Startup business loans are designed for those who have never owned a business before. They also offer super low-interest rates. Your existing FICO score will determine whether you’re eligible for financing.

Most lenders request a minimum of 680 on your credit score before they’ll consider lending. If you’ve got a poor credit score, you’ll need to work on building it up first.

Franchisor Financing

Some of the larger franchises may even offer their own financing departments. It makes sense from a financial standpoint because when franchise businesses pay interest rates and other fees under their banner, they create a recurring stream of income.

Franchisors that offer this service are free to divine whatever terms they like, so make sure you read through their terms and conditions carefully. Some offers of financing are better than others.

Different franchises will also have varying requirements. Some are more stringent regarding previous business experience and credit scores than traditional lenders. Read their Franchise Disclosure Document and study the brand before committing to anything.

Business Credit Cards

Taking out a business credit card will not enable you to cover the higher costs of doing business, but it can cover your smaller obligations.

For example, many businesses often put their supplies and some of their inventory on a business credit card to tide them over until the end of the month.

You’ll be able to obtain a business credit card when opening up your business bank account. Again, do your research and compare different business credit card offers.

How to Get a Franchise Funding

Securing a franchise loan doesn’t differ that much from any other form of financing. Applying for franchise financing is a matter of finding the right lender and sending them a strong application.

The basic steps for obtaining one of these franchise funding loans include:

  • Step One – Compare and contrast different funding options. You need the loan that best suits your new business. It’s always better to borrow less from the right lender than to borrow more from the wrong lender.
  • Step Two – Check the lender’s requirements. Make sure you meet those requirements before applying to avoid wasting your time. Many lenders use automated verification systems, so if you don’t meet the requirements, your application will never even be seen by a human.
  • Step Three – Submit your business plan. You obviously don’t have any current business accounts if you’re just getting started. Instead, you should have a comprehensive business plan explaining your franchise proposition and how you will grow that franchise.
  • Step Four – Wait for the lender to get back to you. Depending on which financing option you choose, this could be a few days or a few weeks. Be patient, and don’t be afraid to examine other options in the meantime.
  • Step Five – Get your money. If approved, you’ll likely receive the funds in your account within a few business days. If rejected, start the process again. Just because one lender didn’t approve you doesn’t mean another lender won’t.

Unlocking franchise funding is often the biggest hurdle entrepreneurs need to overcome. Be patient and be persistent. If you’re struggling to capture the interest of any lenders, you may need to work on your shortcomings as a prospective borrower and revisit once you’ve made some changes.

Tips for Getting Approved for a Franchise Loan

A loan for a franchise can launch your business and propel your career. Unfortunately, not everyone is an ideal candidate – at least initially.

Follow these tips to increase your chances of getting approved for a franchise loan.

Build Your Credit Score

Starting a new business means you don’t have a business credit score to fall back on. Instead, lenders will use your personal credit score to deduce your creditworthiness. Most lenders have minimum credit requirements, so make sure you obtain a free copy of your credit report first to find out where you lie.

So, what are some top tips for building your credit score?

  • Reduce your debt load
  • Improve your credit ratio
  • Make regular repayments on time

In many cases, taking out a credit card and making small purchases can build your score in the long term. If you have a poor credit score, this is an endeavor that could take months. Be patient and practice good credit habits until you meet the lender’s requirements.

Refine Your Business Plan

Lenders will want to see a copy of your business plan. It’s not just a roadmap for growth, but demonstrates your experience and commitment as a business owner.

The biggest mistake you can make is not being detailed enough in your business plan, with the second error being overstating your potential profits. Keep your plan modest and grounded in reality.

Increase Your Personal Capital

Lenders will seldom issue a significant loan for a new franchise business with no money down. It enhances the risk for the lender and, in theory, makes founders less motivated because they don’t have any personal financial stake in the business.

One way to get around constant rejection is to increase the personal capital you’re willing to put down. A few extra thousand dollars demonstrates to lenders that you’re serious about making your new franchise operation successful.

Get a Co-Applicant

Some lenders may also accent co-applicants on a loan application. A co-applicant is a guarantor of the loan, so if you fail to make the repayments, they will be on the hook to cover the loan. Think carefully about taking on a co-guarantor, as not every lender will accept them, and it can be tough to find a reliable one.

Start with a friend or family member and go from there.

Secure Franchise Funding with L3

Building a successful franchise requires hard work, time and dedication. Enlist the help of experienced professionals and have financial experts on your side. At L3 Funding, we specialize in supporting America’s small business community through intelligent resources, support, and financing options.

To learn more about merchant funding, contact L3 today. 

Business Planning

Vending Machine Tips – Starting a Vending Machine Business

How to Break into the Vending Machine Business

While the vending machine business may no longer be a novel idea, it can still be a profitable venture. 

Learning how to invest in vending machines can open up passive revenue streams that many may overlook in specific locations. 

If you’ve been looking into different opportunities to enter a market as a new company owner, starting a vending machine business may be the right option for you. Investing in vending machines has all of the benefits of running a successful business without the risks associated with a brick-and-mortar store. 

Today, we will discuss how to get into the vending machine business while providing some helpful vending machine tips.

Advantages of Investing in Vending Machines

The vending machine business is booming, with a compounding growth of 9.4% expected to continue until 2025. 

By learning how to start a vending machine business, you’ll be entering a market that requires little start-up capital, has built-in flexibility, and provides an opportunity for passive income. 

As an owner of a successful vending machine business, the initial equipment necessary to run it will come down to a computer, printer, and phone. 

You’ll have the freedom to dictate your working hours as you manage and organize routes from the convenience of your phone. 

The vending machine business can be extremely lucrative while, at the same time, easily manageable. Many owners find that they want to learn how to start a vending machine business for free time and flexibility in their schedules. 

Here are some vending machine tips that can help you start your journey toward financial independence. 

Do Your Market Research

Breaking into the vending machine business doesn’t require an MBA or years of complex training. However, several aspects will require thorough analysis for the business to become a success. 

By conducting market research, you will be able to break down the costs associated with starting the business, the necessary time commitment, and when you can expect a profitable return on your investment. 

Decide on the Perfect Location

As the real estate mantra goes, location is everything. The difference between a well-trafficked site and one off the beaten path has a quantifiable impact on your sales figures.  

For optimal results, you will want to locate your vending machines in areas with robust walking traffic, such as:

  • Strip malls and shopping centers
  • Apartment complexes
  • Cafeterias 
  • Schools and universities
  • Hospitals and care centers
  • Hotels and motels
  • Laundromats
  • Transportation centers; airports, train stations, bus stations

Keep in mind that certain locations may require you to comply with regulations pertaining to the Americans with Disabilities Act (ADA.)

You will also want to secure a well-lit location, to avoid potential vandalism and theft. Having to replace merchandise or machinery can significantly impact your bottom line. 

Find Your Vending Machine

When the average American imagines a vending machine, it’s mostly relegated to drinks and snacks. However, if countries such as Japan have taught us anything, vending machines can dispense a variety of merchandise, and some are technical marvels. 

There are several options when choosing between the different types of available vending machines. Many of them provide unique forms of functionality, including:

  • Accepting various forms of payment
  • Enhanced user experience through interactive touch or voice-activated screens
  • Bulk candy dispensers
  • Full-line vending

One of the most profitable types of vending machines business models is to offer full-line vending.

This model will have several types of vending machines that offer a wide range of products, including:

  • Snacks
  • Coffee
  • Fresh fruit
  • Canned and bottled soda
  • Cold food
  • Frozen food, such as ice cream

Stock Your Inventory

Once you’ve found the perfect location and decided what you want to sell as a new business owner, it’s time to actually stock your inventory. 

Ensuring that your vending machines are consistently stocked is the key to a profitable business. However, you need to keep track of which items are performing well and which may not be suitable for the location’s demographic. 

For instance, if you have a beverage dispensing machine outside of a gym, you may notice that one sports drink brand significantly outperforms another. In this case, it’s a simple adjustment to what inventory you’ll reorder. If the trend continues in favor of a particular brand, you can begin negotiating with the distributor to better deal with bulk purchasing.  

Explore Your Financing Options

While the financial threshold of breaking into the vending machine business isn’t set very high, purchasing any equipment will require upfront capital. 

There are several different routes you can take when it comes to financing your business venture.

Vending Machine Equipment Financing

Equipment financing is a method of purchasing specific business equipment to get your company operational. The benefit of equipment financing is that it allows you access to modern technology without having to pay for it upfront, out-of-pocket.  It also comes with the advantage of being easier to obtain than a traditional small business loan issued by a bank since the equipment itself will be used as collateral. 

Equipment Leases

An equipment lease shares similar characteristics with equipment financing. The major difference is that you have the option to either re-sign the lease when the term is over or move on to another piece of equipment. 

L3 Funding

One of the easiest ways to secure the funding needed to start and operate a vending machine business is by contacting L3 Funding. We offer a wide range of merchant funding solutions, and we’re invested in the success of your business, as our success depends on yours. Apply for the small business working capital you need today!

Business Planning

How to Start a Shoe Company: A Step-By-Step Guide

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Partnership vs Corporation: Similarities & Differences

Any small business owner needs to decide on a legal entity when they incorporate. The decision is a big one because it impacts your structure, legal obligations, taxes, and bottom line. There’s considerable debate over partnership vs. corporation and which one works best. If you’re struggling to decide on the right legal entity for your new venture, here’s what you need to know.

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How to Secure Heavy Equipment Financing

A Guide to Heavy Equipment Financing

Heavy machinery financing can be hugely beneficial to businesses that rely on heavy equipment for their day-to-day operations. Heavy equipment leasing companies rent out machinery at a set price, saving businesses thousands of dollars they would spend buying new equipment.

Alternatively, heavy equipment financing companies set construction equipment financing rates to make machinery affordable and attainable for businesses. Massive machines can be challenging to finance out of pocket, and in most cases, purchasing equipment upfront is not pragmatic.

There are many advantages of leasing your building machinery or working with construction equipment finance companies. We’ll discuss these benefits shortly. First, we’ll share some information about construction equipment loans and leasing.

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Guide to Opening a Marijuana Dispensary

Now that marijuana use is permitted in most of the USA and Canada, a green rush has swept through the nation. Cannabis is now legal to some degree in over 95% of the U.S., whether for medical or recreational use. 

Savvy entrepreneurs across America are acquiring their dispensary license and working out how to start a dispensary. Opening a marijuana dispensary requires time, effort, and planning, whether you’re looking to create a recreational or medical marijuana business.

New businesses in the marijuana industry are popping up all over the U.S. and Canada, making this a lucrative time for opening a marijuana dispensary. In this post, we’ll discuss how to start a weed dispensary, what licenses are needed to start a dispensary, and what kind of budget you’ll need to start a cannabis business.

Business Planning

How Much Does It Cost To Open A Bar

How much does it cost to start a bar? It seems straightforward: get a liquor license, find a space to rent, hire some staff, buy some inventory, and let the libations flow. However, the items listed here are a bit more complex than they may seem. Plus, there is more to running a successful bar than just having all the correct pieces in place—they have to work together to be profitable.

In the right circumstances, opening a local pub or bar can be a great investment. If you’ve been interested in pursuing a new business endeavour by opening a bar, read on. In this post we’ll go over how much money is needed to open a bar, so that you can start your business well-equipped with the information you need to be successful.