Franchisees Turn to Franchisors for Loans to Purchase a Franchise

In the current economic cycle one significant impediment to franchise expansion relates to capital markets and the shortage of capital available to new franchisees.  The lack of financing available to prospective franchisees has, naturally, impacted the expansion franchise systems and royalty revenues.

According to the International Franchise Association the franchise industry is expected to seek $10.1 billion but banks are only expected to lend $6.7 billion leaving $3.4 billion dollars being requested of the bank by franchisees that will be turned away. So what option is left for these franchisees if they do not have the full amount of money for purchasing a franchise and funds to up-keep the franchise? One answer is the franchisor.   In the past banks were the primary source of lending for franchisees but in today’s day and age where banks are very tight when it comes to approving business loans and lending money many entrepreneurs wishing to become franchisees are turning to the franchisor of the franchise they are interested in becoming a part of for their financing to buy a franchise location. 

In a recent article in the New York Times, “Tight Credit Is Turning Franchisers into Lenders”, written by Kermit Pattison franchisors offering private capital to franchisees is becoming a more and more popular option.  Franchisors are trying to grow their franchise and those who want to be franchisees are trying to buy franchises but the one things standing in between the two is financing so franchisors are trying to offer different incentives to make it easier to bring new franchisees on board  – financing through the franchise being one along with many other incentives such as reduced start-up fees, waiving fees, waiving royalty amounts and reducing square footage requirements for their franchise store locations.

Business owners and franchisees who were once almost immediately approved for a business or franchise loan are having a rough time getting financing regardless of past history, credit score and their net worth.  If you have found yourself in this position it is possible that the franchise you are considering offers privately funded financing and this may be an option for you. 

If financial and/or capital is a available to you as a prospective franchisee then the next stap is to conduct the appropriate due diligence to ensure that you are putting your capital to good use.