What Is Franchisor Financing? Here's Everything You Need to Know. You've finally found the right franchise — so now it's time to ask yourself: How are you going to pay for it?
This story appears in the September 2023 issue of Start Up.
If you've decided to become a franchisee, the start is often the bumpiest part. First there's all the research. Then there are the countless interviews with franchisors and existing franchisees. Once you've settled on a brand, there are a lot of documents to produce and review.
Finally, you must confront what is often the most daunting challenge — securing the financing needed to buy a franchise. After all, initial and ongoing capital needs can add up quickly.
Related: The 4 Biggest Myths About Franchising
You may have the cash to finance yourself, or you might be able to obtain financing from banks, the Small Business Administration (SBA), or private investors. But depending on the franchise you want to buy, there might be another, lesser-known financing option available to you: It's called in-house financing. Not all franchises offer it — and even some that do may not offer it across the board to all franchisees. But when it's available, it can be an attractive alternative.
So what exactly is in-house financing?
In this context, it means the franchisor is offering to finance your purchase of their franchise. Rather than go to a bank or other lending institution, you'll make payments directly to the franchisor over a set period of time. Like any financial agreement, there are pluses and minuses to this. Let's take a look.
Related: Busting Franchising Myths and Choosing the Right Opportunity
Pros
1. Flexibility
The franchisor may offer better lending terms than a traditional lender. This can mean extending the payment period or offering lower interest rates, which can make financing more affordable and manageable.
2. Simplicity
You are eliminating a third party (a bank) in the transaction.
3. Investment
Because the franchisor has a direct stake in your franchise, it is probably more invested in your success.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.
Cons
1. Large down payment
You may be required to pay more upfront to keep your monthly payments and interest rates low.
2. Limited options
Because you don't have other banks to talk with, you have less ability to negotiate or play multiple parties against each other.
3. Rigidity
The franchisor will offer terms for the loan, and you may have no choice but to take them.
Related: 10 Tips to Go From Employee to Boss, From Franchisees Who Did It
If you decide to obtain in-house financing, here's what to do next: Read and understand all of the financing terms, know exactly what you're committing to, and ask questions and seek clarification on anything you're uncertain about.
The franchisor should be willing to work with you and ensure that you fully understand the financing arrangement.
In-house financing is a great option for many franchisees, especially those who want a close working relationship with their franchisor and don't want the hassle of working with a third-party lender. But ultimately, as long as you do your due diligence to understand what financing option is best for you, your franchise should be on the road to financial success
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
