Small Business Funds
If you’re thinking about starting your own venture, opening a franchise business is a great way to go. But keep in mind that it requires a significant investment. There are some low-cost franchise businesses that can be started for under $20000 while others can cost several million dollars to open. However, according to Franchise Business Review, the average franchise business will cost $150,000. This is not a small amount. That’s why it is crucial that as an aspiring entrepreneur, you understand the basics of franchise funding. With the right knowledge and guidance, securing small business funds for your franchise can be an easy process.
So, let’s go ahead and explore the typical funding structures that new franchisees usually get – from franchisers – and figure out how to utilize these options effectively to start a booming franchise.
Why Own a Franchise?
For any small business owner, buying a franchise comes with several benefits. First and foremost, if you are a new entrepreneur, this will be a good way to run your own operation while having the guidance of a recognized brand. Here are some key benefits with starting a franchise business:
- No Need to Create Brand Awareness
One major problem that most entrepreneurs face while launching their own startups is creating enough brand awareness. However, with a franchise, developing a brand identity is not something to worry about. Since most franchise company have been operating for a few years at minimum, the brand can be recognized immediately.
- Greater Potential for Profits
Because the franchise company have generated enough brand awareness and developed a proven business model, there is a greater potential for high profit margins.
- Get Trained to Operate the Franchise
Even if you do not have industry-related experience, franchise companies provide enough training programs as part of franchise process to get you ready to operate the franchise.
- Low-Risk Business Venture
Since large brands back franchises, this type of business tends to be lower risk compared to others. Though there is nothing as guaranteed success in business, the risk of failure with a franchise is lower than starting your own venture from scratch.
But there are potential risks to opening a franchise too like high upfront costs, restrictive guidelines, recurring charges and more which can require you to opt for small business funds to manage the expenses.
What Are the Three Main Franchise Costs?
If you are serious about investing in a franchise business, you need to understand three main categories of cost:
- The Franchise Fee
In layman’s term, this is an admission fee charged by franchise companies to grant you a license to operate their business for a defined period, using their brand name and business systems. This is different than royalty fees. This fee can range from $25000-$50000 on average and in some cases, can be more.
- Startup Expenses
This is the initial cost of opening and operating a new business and it can differ from franchise to franchise. Like it is mentioned above, the average franchise cost in the United States is $150,000 which can be out of reach for many.
- Recurring Fees
Along with franchise fee and startup costs, all franchise companies charge recurring fees in the form of royalty fees, advertising & marketing fees, technology fees, and more.
How Can a Franchiser Help with Franchise Funding?
Opening a franchise is not a small task. Every franchise company knows and understands that. That’s why franchisers often offer funding options to help new franchise owners meet the initial cost of opening a franchise. Let’s check out different ways franchisers structure the funding options to make it easier for a franchise owner operate:
- Direct Financing
Since the initial franchise investment tends to be on the higher side, a lot of franchisers offer direct loans. These loans come with affordable terms like low interest rates and deferred payment plans making it beneficial for those individuals who face difficulties in securing traditional small business funds due to lack of good credit or collateral.
- Tie-Ups with Approved Lenders
Many franchise companies have tie-ups with banks and other financial institutions to provide funds to their franchisees. These collaborations often come with simple application processes and affordable terms than available to general public, making this very useful to secure small business funds.
- Tapping into SBA Loans
Consulting with the Small Business Association (SBA) can be fruitful as they offer loans especially for small businesses, including franchisees. Although the actual funds are provided by an approved lender, the SBA too guarantees a part of the repayment, making the interest rates and terms more affordable than other business loans. The SBA 7(a) loans are popular among small entrepreneurs because of these reasons.
- Going the Alternative Financing Route
While direct funding from franchisers can be an attractive option, it can be beneficial to check out other alternative financing options. But keep in mind that interest rates might be tad higher than other traditional funding options, and repayment period will be shorter compared to others.
- Opting for Small Business Grants
Another avenue to explore when you are considering franchise funding is small business grants. But check the fine prints of these applications as grant-issuing authorities look for specific businesses to provide grants.
To wrap it up, opening a franchise is a great way to step into the world of entrepreneurship. But it is important to understand the financing options that are available. By leveraging any or all of the options, aspiring franchise owners can secure small business funds, they can turn their franchise dreams into reality.
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