Written by A franchise loan is a type of business loan designed to help you purchase (or set up) an outlet of a business franchise like McDonald’s, Chemist Warehouse or Officeworks. They work similarly to a standard business loan to buy an existing business, but they do account for some of the unusual features of franchises.
Franchises are regarded as an innately less risky business model as far as lenders are concerned, because you’re working with a tried and tested business model and generally a well-known brand. As such, franchise loans often come with better interest rates than you might get buying an independent business.
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How do franchise loans compare to traditional business loans?
So, what sets franchise loans apart from more traditional finance to buy a business, and how should you compare your business loan options? Franchise loans have a few distinctive characteristics:
- The business has more value to a lender – When borrowing to buy a business, the current success of the business is considered. Franchises are highly regarded here, as franchising indicates an inherent level of financial success to merit multiple locations.
- You can borrow more of the overall value – Because franchises are considered a safer investment (given that you’re buying into a business with a proven track record), lenders are willing to offer a larger proportion of the business’ overall value compared to an independent business purchase.
- Higher minimums for some lenders – Franchise loans often deal with large amounts, which means some lenders can have very high minimum amounts compared to a more conventional business loan – potentially in the range of $100,000. Other lenders have lower limits, but there are still fewer options available for smaller franchise loans.
- Loan terms often capped with the lease – Franchises often operate on property that’s leased rather than loaned outright; purchasing the business might not mean purchasing the property as well. As such, franchise loans can often have short loan terms (often five to ten years), as the term is often tied to the remaining time left on the lease. This might not be an issue for an unsecured franchise loan, which might already have a shorter loan term than that.
- Might only be available for specific franchises – Some lenders have lists of specific franchisees which they’ll offer franchise loans for. This means the list of potential businesses you can purchase with a franchise loan is relatively small compared to a more traditional business loan.
How much can I borrow with a franchise loan?
Franchise loans are available as both secured and unsecured business loans – depending on what assets you can bring to the table as collateral. Standards vary from lender to lender and things like credit rating will come into play but, as a general rule, you might be able to borrow around 50% of the value of the franchise business with an unsecured loan and between 50% and 70% with a secured loan.
The loan will cover most of the basic expenses associated with the franchise – including the stock, assets, franchise fees and training costs – but obviously you need to contribute the remaining 30%-50% of the funds.
In some cases, if the franchise outlet you’re purchasing is well established and you have a substantially larger-value property or other franchise outlet to use as security, you might have even more lending power of up to 100% of the value of the franchise.
Pros & cons of buying a franchise vs an independent business
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Frequently asked questions about franchise loans
No – but it certainly helps. Lenders want to see evidence that you’ll be capable of managing an outlet of the franchise where possible, so they’ll be looking for experience in management, the type of industry and with a franchise business model. The more of these you tick, the better.
Yes – vendor financing, where the business owner is effectively lending you the money to buy the franchise, is becoming increasingly common in Australia. It generally involves paying the owner a deposit up front and the remainder of the sale price (with interest) in instalments over time like a standard loan. It’s obviously up to the business owner if they’re willing to offer that option, but it could be worth enquiring about it.
Yes – lenders will still need to see a business plan, even when you’re working with a business model as tightly defined as a franchise. The key thing is demonstrating to the lender that you understand what you’re getting into, and that you’ve thought through what’s needed and how to approach it.
You can get franchise financing to set up a new franchise, although they work a little differently. In that case, the lender will probably focus more on the strength of your business plan, which should be as comprehensive as possible.
Any time you buy a business, it can make things more difficult if key staff leave. With a franchise, the impact is probably less significant – the fact that franchises have standardised training simplifies the process of training up new staff. You might even be able to recruit staff that have worked with another branch of the franchise, who already understand the business and how it works.
No. It helps to be a citizen or permanent resident, but it’s not essential for getting a business loan in Australia. But if you’re not, you’ll generally need to be under a Business Innovation and Investment (Provisional) visa (subclass 188) to allow you to conduct business and investment activity.
Yes – even if you’re looking for a loan for your Melbourne business which trades in Queensland, you won’t have to specifically look for a Melbourne or Brisbane business loan. Lenders are focused on whether your business is earning enough funds to qualify for the loan you’re applying for and aren’t concerned with where you’re based. Because these loans are 100% online, they can supply financing to a wide range of businesses around the country, even if they’re operating across multiple states.
