Franchise Loans

Name: Franchise Loans
Creator: Savvy
Published: 2021-11-09T10:53:43+10:30

It won't affect your credit score.

Written by , updated on July 3rd, 2024

What are franchise loans?

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.

Different lenders approach franchise financing in different ways and not every lender offers the same features. Some lenders offer bad credit franchise lending, charging more interest but being more tolerant of poor credit scores, or a low doc option, which requires less supporting paperwork, while others don’t offer either. When deciding on which is best for you, you can use our business loan repayment calculator to help you determine what each offer might cost you on an ongoing or overall basis.

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.

Types of business loan

Unsecured business loans

The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.

Secured business loans

If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.

Small business loans

Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.

Low doc business loans

Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.

Lines of credit

A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.

Invoice finance

Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.

Equipment loans

A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.

Supply chain finance

With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.

Inventory finance

Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.

Overdraft facility

An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.

Cash flow loans

You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.

Why compare business loans through Savvy?

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Pros & cons of buying a franchise vs an independent business

PROS

Established brand

With a franchise, you’re purchasing a brand that’s already well recognised and often very popular. You don’t need to build brand awareness, as you already start with it.

Wide customer base

The brand you’re buying into doesn’t have to be a local name – franchises can potentially be popular nation-wide. This means your market is much wider than locals who know you, so visitors from other regions or even other states will know and appreciate your brand on sight.

Marketing and advertising

With a franchise, the majority of the marketing is already done for you, often including things like television campaigns that might be well out of reach for an independent business. These marketing costs are generally fixed (as part of the franchise fee) and you generally get a lot of value for money from that investment.

Staff training

Generally the franchise will have its own training program for staff, which is often handled by the central office. This takes a lot of effort off your shoulders.

CONS

Less control

Many people buying a business do so hoping to build something uniquely theirs, or see some idea realised. With a franchise, you often don’t have much control how the store runs or what you’re selling – you're working with someone else’s vision.

Substantial franchise fees

You get a lot for your money when you’re paying franchise fees, but that doesn’t mean the fees aren’t substantial – often tens of thousands of dollars annually, or more. You don’t get the option of cutting back on advertising for a little while when things are tight, either.

Detailed requirements

Franchise businesses will generally have very strictly-defined models of how they’re set up and how they operate. There’s a lot of work involved in understanding all these requirements and ensuring customers walking into your franchise are getting the experience they expect.

Single business model

Franchises generally have a single, one-size-fits-all business model that works in many – but not necessarily all – situations. You don’t have much flexibility to adapt your business model if it’s no longer working well for your business’ situation.

Frequently asked questions about franchise loans

Do I need experience with a specific franchise to get a loan?

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.

Is vendor finance an option for a franchise loan?

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.

Do I need a business plan to buy a franchise?

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.

Can I get a loan to set up a new franchise outlet, or do I need to buy an existing one?

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.

Does it matter if the staff don't stay on after I buy the franchise outlet?

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.

Do I need to be an citizen to get a franchise loan in Australia?

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.

Am I able to get approved if my business trades interstate?

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.

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