8 myths of franchise loans

Franchises can be a high risk but also a high reward endeavor. Instead of being an employee of a company, you start your own from scratch.  Then, you try to make your one, or multiple, stores as successful as possible. To set up a franchise, first the franchise needs financing. Below are some common misconceptions, or myths, about franchise loans.

  1. A Franchise is the Same as a Chain Store

Though they may seem to be the same thing, chain stores are, in fact, completely different. A chain store is tied to the hip of a corporation, including its investments and liabilities. A franchise is owned by an outside investor. Therefore, you would usually undertake the whole financial burden of setting up the initial business such as:

  • Franchise fee
  • Royalty fees
  • Advertising fees
  • Equipment costs
  • Commercial loan to buy or lease property

In the long term, however, you reap more of the financial benefits and independence if the franchise is successful. Except for basic guidelines set by the corporation and royalties to pay for use of the brand, your franchise is a separate entity. Thus, if the main corporation is running into financial troubles, it does not adversely affect your own business except for the licensing and advertising fees. You choose your own employees and are your own boss when it comes to running the day-to-day operations.

  1. Franchisors Always Help You Setup the Business

Unfortunately, in most cases, they do not help setup your franchise. In fact, most of the time you have to put forth all of the money yourself, plus pay an additional franchise fee to the corporation to acquire the rights to use it’s branding. You will have to present to a lender your personal financial statement with your assets, personal income, liabilities, and net worth. You need to show that you are financially responsible and present a viable business plan with a high chance of success.

  1. No Finance Options Besides Direct Lenders

In order to expand their brand to more franchise locations, companies have sometimes offered incentives for business owners to spur partnerships to open more franchises. Some corporations now offer financing programs of their own to first-time franchise owners who are qualified. In fact, former franchisors founded a company called Franchise America Finance. The company works with multiple established brands and new prospective business owners to secure franchise financing.

  1. All Brands are Mostly the Same

This statement, of course, is a complete fallacy. Every brand is different, including their  financing. A franchise disclosure document can give you a lot of background information about the company you may be interested in. Please see below for a sample franchise disclosure document.

Example of a franchise disclosure form.Different franchises have different fees and royalties, as well as varying strict guidelines, some more expensive to comply with than others. Proven brands such as McDonald’s, 7-Eleven, and Dunkin’ Donuts may be more expensive but for a good reason: they are successful. The more established and popular a brand is, the more likely you will be successful under that franchise.

  1. Down Payments and Collateral are Industry Standards

Again, many of the financial figures depend on the size of the deal and which brand you are partnering with. If it is a large, well-known brand, then the franchise fee will most likely be higher, such as $20,000 to $30,000. Also, if you are looking to just open one store, the down payment will most likely be on the lower side, such as $10,000 to $15,000. If it is a multi-store deal, then there is a larger risk factor which increases the down payment to a much higher percentage.

  1. Structure of Franchise Loans are Similar

While containing the same elements, franchise loans vary wildly. Some franchises will offer loans that have no principal and only a simple interest. Some franchise loans will finance only portions of the startup cost and take on a percentage of the debt incurred by the new franchisee. Rates will vary as stated before, especially when financial lenders take into account your financial history and credit score.

  1. Conventional Commercial Loans are the Easiest Path

This is true if the franchise has a proven track record as a successful business owner with a great credit history. Otherwise, in the long term, those who have had financial trouble in the past or are starting a business for the first time can be barred from low interest options.

  1. You Cannot Get a Loan Through the Government for Franchises

The Small Business Administration (SBA) helps out small business owners of all sorts, including franchisors. Since a portion of the loan is guaranteed by the government, financial rates and terms are often more favorable, even to those who have little or poor credit history. About 10% of all SBA loans go towards franchise financing. This process is much faster than conventional lending.