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 vs unsecured franchise loans
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.
Should you buy 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 such as brand recognition, a proven business model, ongoing training and support, established supply chains, and marketing assistance.
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.
Purchasing an existing franchise is also 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... pros & cons of buying a franchise
Pros
- You're setting up as 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)
Cons
- 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
Ready to compare franchise finance options?
Get your best offers from multiple lenders. There's no obligation and checking your rates won't impact your credit score.
