Franchising is the licensing of an existing business model and brand. The franchisee is given the right to market the trademark of an existing business in exchange for fees and a percentage of the business’ profits.
How Many Franchises Are There?
According to the Franchise Business Economic Outlook in 2014, there were roughly 770,000 franchise establishments, employing over 8,500,000 employees. Franchises represent $493 billion in GDP and $839 billion in output — making franchise businesses an essential makeup of small businesses in the U.S..
The economic impact of veteran-owned franchises is especially impactful to the U.S. economy, being that there are 66,275 veteran-owned franchise (accounting for 13.4% of all franchised businesses).
What are the Types of Franchises?
The most common types of franchise businesses
- Business Services
- Commercial and Residential Services
- Personal Services
- Quick Service Restaurants
- Real Estate
- Retail Food
- Retail Products and Services
How Much Does It Cost to Buy a Franchise?
The costs associated with purchasing a franchise small business can range from as little as $10,000 (for cleaning services) to over $2,000,000 (for gas station/convenience stores).
Financing Options For Franchises
Being that each franchise launch means the business doesn’t have existing/trailing revenue, opening a franchise business is essentially opening a start up business. As with start ups, the small business lending options are limited — but definitely available. Here are the main options:
Franchise Financing From a Bank
If you have pristine credit, plenty of assets (along with collateral) and relevant experience in the related field, a bank business loan to start/purchase a franchise is possible. But, being that a franchise purchase is essentially a start-up, banks tend to shy away from providing loans to franchises because of risk.
- Bank Business Loan Rates: 4-10%
- Bank Business Loan Terms: 1-5 years
SBA Loans for Franchises
Outside of using personal finances, SBA loans are a the most common ways for small business owners to attain financing to purchase and/or provide capital to franchise businesses. SBA loans are especially important because it reduces the bank’s risk, as the government will backstop up to 85% of the total loan amount should the franchisee default.
- Rates of an SBA Franchise loan: 6-8%
- Terms of an SBA Loan: 7-25 years
Alternative Loans for Franchises
Mid Prime franchise loans are a great tool for small business owners who are unable to get bank rate working capital, but don’t want to pay exorbitant rates that a small business owner would get from a business cash advance.
- Mid Prime Franchise Loan Rates: 9-25%
- Mid Prime Loan Terms: 1-5 years
Equipment Loans for Franchises
Franchise equipment leasing allows the franchisee to attain needed equipment and machinery to operate the franchise, without paying the full upfront costs.
- Franchise Equipment Leasing Rates: 5-15%
- Franchise Equipment Leasing Terms: 1-2 years
Franchise Merchant Cash Advances
A franchise merchant cash advance (MCA) is a short-term loan that provides capital to franchises that need funding quickly. Approval for a merchant cash advance can take a matter of minutes, and funding can be completed in as little as 24-48 hours.
- Franchise Merchant Cash Advance Rates: 16-100%
- Franchise Merchant Cash Advance Terms: 4 months – 2 years
Stock Loans For Franchises
Using a stock loan (securities-based financing) allows a potential franchisee to leverage the value of their stocks without giving up ownership of the stocks.
Securities based financing allows potential small business owners to get fast, affordable funding, while also having the ability to keep all the upside of keeping their stocks (dividends and stock price growth). Funding usually comes in the form of a line of credit backed by the stocks’ value.
- Stock Loan Rates: LIBOR +2-4%
- Stock Loan Terms: 1-2 years