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What is a franchise loan?
A franchise loan is a business loan designed to help borrowers purchase a franchise licence and establish a business as part of a franchise.
A franchise loan may be easier to get approval for compared to a loan to establish an entirely new business, as going into business as a franchisee is generally considered to be less risky. In that sense it is more similar to getting finance to buy an existing business.
If you're looking to buy a franchise licence, there are a number of different finance options you could consider, as well as ways to finance your business once you're up and running.
Secured franchise loan
To be eligible for secured franchise finance, you'll need to own an asset that can act as collateral. This is often a residential property if the borrower owns their own home or commercial property or another business asset if you already own a business.
Some lenders will allow a franchise loan to be secured by the franchise itself, but this is less common as it's riskier of lenders.
Unsecured franchise loan
Unsecured business loans don't require an asset to be used as collateral for the loan. This means you're not risking a personal asset in order to fund your franchise purchase. However, you can expect to pay a higher interest rate due to the increased risk the lender is taking.
The lender will be relying on the strength of the franchise brand and the potential for the venture to generate enough regular revenue to repay the loan.
Other franchise finance options
Low doc business loan
A low doc business loan could be a suitable option for financing the franchise purchase if you're not able to apply for a loan with the standard documentation that lenders expect. Just bear in mind that high interest rates usually apply.
Bad credit business loan
If you have issues in your credit history (e.g. previous defaults causing you to have a low credit score) you may need to apply for a bad credit business loan. It can be more difficult to be approved for a loan with bad credit but buying a franchise could give you a better chance of approval compared to starting your own business.
Chattel mortgage
If you only need finance to purchase a vehicle or piece of machinery (i.e. not to purchase the franchise licence itself) you could consider a chattel mortgage which is a type of secured equipment finance. The vehicle being purchased will be used to secure the loan.
Fit out finance
If you're buying into a retail franchise and need funds to fit out a premises, specialist fit out finance could be more suitable than other broader categories of business finance.
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GET STARTEDGET STARTEDWhat are the advantages of buying a franchise?
When you buy into an established franchise, you get a lot of extras that you don't if you set up in business by yourself:
- A recognised brand
- An established customer base providing consistent, ongoing revenue
- Existing systems and facilities
- Existing processes and operating guidelines
- Support from head office if you need it and centralised budgets for the likes of advertising that will benefit you
- No delay on business operations (you may be able to hit the ground running)
Recent Australian business data shows almost half of newly-established businesses don't survive past their third year of operating. Buying into a franchise is one way of insulating from some of the risks faced by new businesses. But as we'll see below, there are possible downsides too.
What are the downsides of buying a franchise?
Purchasing an existing franchise is a relatively low-risk option when looking to finance an existing business.
The main downside to purchasing a franchise is meeting franchisor approval criteria. Basically, this is when you’ll speak with the franchisor (a.k.a. the parent company for all the franchises in operation) and decide on an arrangement that suits you both.
However, they may impose strict conditions on how you choose to operate the business. If you’re looking to make something entirely of your own and not conform to the demands of a franchisor, an existing franchise may not be the choice for you.
In summary, the risks of buying into a franchise include:
- Requires franchisor approval
- Existing financials can be complex
- Existing equipment or premise leases may expire
- You're at risk if the parent company's reputation is damaged
- Low flexibility in negotiation with the franchisor
Where to find franchises for sale
A great place to start is to attend one of the franchise conferences organised by the FCA (Franchise Council of Australia) who list their upcoming events on their website.
You can find franchises for sale through:
- National Franchise Conventions with the Franchise Council of Australia
- Gumtree
- Inside Franchise Business
- Franchise Direct
- A business broker
Shopping around for the right loan can save you thousands of dollars in interest and fees.
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Popular questions about business franchise loans
Can I get finance from the franchise operator?
Yes it's common for the parent company to offer its own finance solution (known as vendor finance), or to have a preferred lender.
If this is the case, you'll make regular payments to the company you purchased the franchise from, including interest and fees.
This won't always represent the best deal for you, however, and it's worth seeing what external finance deals are available.
What do I need to apply for franchise finance?
When you apply for a franchise loan, the lender will want to see information about you and the business you're buying, plus your plans for operating it once you've bought it. Expect to be asked to provide:
- Identification documents
- Details about your own finances (assets and existing debts)
- Details about your experience relevant to the business you're buying into
- Information about the franchise parent company and how it is performing overall
- A business plan outlining how you will run and grow the business
Will I need to invest some of my own money in order to get approved for a business franchise loan?
It generally helps if you can demonstrate to the lender that you are putting in some of your own money. It demonstrates you are serious about the venture (you have 'skin in the game') and it reduces risk for the lender. But it's not always necessary to do this, particularly if you are an established business person with a track record of establishing and growing businesses.
Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
