After the investor has researched and chosen the right franchise, the next step is to decide how to finance this business. For smaller and less expensive investments like home-based business franchises, there may be no financing needed. Cash savings or credit cards can cover the franchise fees incurred. For most other franchises, it is necessary to obtain some sort of financing in addition to cash investments to cover initial investment fees and ongoing overhead costs. For this very important step, it is vital to first take a close look at all of the costs involved. It is imperative to perform a total cost analysis to have a realistic idea of the financial commitment involved. Once this assessment process has been completed, it will be easier to decide on the right financing options.

A prospective franchisee’s best resource for funding information is the franchisor. They should be able to help answer questions about costs and financing options. The franchisor wants the entrepreneur to invest in their company so that they can expand their business and increase their profits, so they are likely to aid the investor in securing financial backing. Many times franchisors either have agreements with lenders to facilitate funding of their franchisees or they offer their own financing. Franchisors may offer what is called, “debt financing”, wherein the franchisor carries a portion of the business expenses. It is still the ultimate goal of the investor to find the lowest possible financing rates, so even if a franchisor offers funding, it may not be the most economically sound decision, and other avenues need to be pursued.

Another financing option might be to acquire lending through a franchise finance lender, who specializes specifically in franchise loans. Franchise lenders will look at different factors than other financial institutions. They might be more prone to provide backing for a franchisee with less equity if they are comfortable with the reputation and track record of the franchise they are purchasing.

An obstacle that arises when attempting to secure funding is the need for collateral. Most financial institutions want to see items of value such as a insurance policies, stocks, and bonds to secure the loan. If the loan is defaulted on for whatever reason, the franchisee could lose their entire investment, along with any collateral they used to obtain the investment. Some important things that any funding institution wants to see is an excellent business plan, good credit and the ability for the investor to contribute a portion of the financing.

Aside from a bank, there are other options for a franchisee to locate funding. Personal loans from friends and family members, government loans, and home equity loans are other alternatives. Regardless of the source of the funding it is most important to find the source of financing that will require the least amount of collateral, with the lowest interest rate, and best terms of repayment.

Financing a franchise is a challenging process. A total cost assessment will help to create a well thought out business plan, and make choosing funding options easier. If a franchisee is prepared with a solid business plan, cash investment, good credit, and collateral, then they will have access to more financing options and sources. Regardless of the source, it is important for an entrepreneur to meticulously investigate to find the best rates and terms for a loan.