Franchise Financing: What Will You Do?

You've done all the research, searched your soul, looked at the local market, and finally found the franchise that is right for you. The next big question is how you will finance it.

Just about all franchises have a franchisee fee, and Yahoo Small Business reports that the average such fee is $20,000 to $30,000. There are also other assorted costs, such as legal fees, real estate expenses, royalties, working capital requirements and whatever else is part of your opportunity's price tag. To get into the game, you'll have to decide how you will finance your franchise, so check out the following options and their pros and cons.

Your Local Bank

Banks, particularly commercial banks, do offer loans to franchisees. Your credit will be a big factor here, and you'll need to prepare a full loan package that includes past tax returns and all of your financials to date. The lender will look for collateral to back the loan, so be prepared to mortgage your home or offer up another asset plus a down payment.

The upside to a bank loan is that if your credit is good, you should receive a low interest rate and your money relatively quickly. The downside is that you will have a loan payment to make each month, and if you back it with an asset, you could wind up losing that asset if you can't make the payments.

You can also try a loan through a lender that is backed by the U.S. Small Business Administration. SBA loans are considered less of a gamble by lenders because the government is taking on some of the risk. However, you will need to meet the SBA's credit and financial criteria to qualify, and many SBA loans that don't involve real estate have terms of less than ten years.

The Franchise You Want

Some franchises offer financing themselves by way of deferring part of the franchise fee. While you might not have to put up collateral if you go this route, the interest rates are usually higher if you finance through the franchise itself rather than another source. Review any franchise financing packages thoroughly before making your decision.

Look at the pros and cons of all the financing options available to you before you decide between the lender and the franchiser. Your personal situation and finances should be the ultimate dictator of the financing you chose and take advice from professionals, as you're the one who will have to pay the money back.