Picture this: You’re standing in your bustling franchise, the smell of success (and maybe french fries) in the air. You’ve mastered the art of running one or maybe two locations, and now you’re dreaming bigger. Maybe you’d like to open a location across town, or perhaps you’re imagining locations spanning your state. That’s the beauty of franchising—the potential for growth is baked right into the business model.
However, whether you’re serving up sandwiches, cutting hair, or shipping packages, expanding your franchise empire requires money—sometimes lots of it.
In this article, we walk you through the small business financing side of franchise growth. We’ll help you figure out if you’re ready to expand and introduce you to the different ways you can fund your franchise dreams. From government-backed loans that can give you a boost, to banks that speak the language of franchising, to options for when you’re considering large-scale expansion–we’ve got you covered.
How do you know if your franchise is ready for growth?
It’s the goal of the majority of franchise owners to grow, sometimes significantly to 10, 20, or even more than 30 locations. However, growth should be carefully planned. Before you start looking for money to grow your business, you need to be sure you’re ready. Here are some ways to determine if you are:
- Ask your franchise partner: If you’re working with a strong franchise partner, they often have tools to help you understand if you’re ready to grow and will let you know proactively if you’re ready to do so. They’re typically able to provide a detailed market analysis, sales forecasts, cost projections, performance benchmarks and more.
- Do your own research: If your franchise doesn’t give you this kind of help, you’ll need to do some homework yourself. You can start with our guide on small business expansion. You’ll need to make sure your sales are strong, your revenue is rising, and that your customer base is growing geographically, among other factors.
Financing options for franchises
Once you know you’re ready to grow, it’s time to look at ways to get the money you need. Knowing your options will help you be prepared when the time comes. Here are the most common financing sources franchise owners turn to:
SBA 7(a) loans
The U.S. Small Business Administration (SBA) 7(a) loan program is a valuable resource for many franchise owners, especially in the early stages of growth. This program guarantees a portion of the loan provided by a participating lender, such as Grow America. This guarantee reduces the risk for lenders, making them better able to provide favorable terms to borrowers. Key benefits of SBA 7(a) loans include:
- Lower monthly payments due to longer repayment terms
- Lower down payment requirements compared to conventional loans
- Competitive interest rates
It’s worth noting that while the SBA no longer maintains an official franchise directory, many lenders still reference it when considering loan applications. This unofficial list can work in your favor if your franchise was previously included, as it suggests to lenders that other financial institutions have successfully worked with your franchise system before. Note that not all franchises qualify for SBA loans. It’s important to check your franchise’s eligibility before pursuing this option.
Conventional bank financing
For established franchise owners with multiple locations and a strong financial track record, conventional bank financing can be an attractive option. Some banks specialize in franchise lending, offering expertise that can be particularly valuable as you expand your business.
These franchise-focused lenders understand the nuances of the franchise business model and often have dedicated loan officers who specialize in franchise financing. To find these lenders, you can:
- Search online for “franchise financing”
- Ask for recommendations from your franchisor
- Network with other franchise owners in your system
To qualify for conventional bank financing, lenders typically look for:
- Ownership of multiple franchise locations
- A strong balance sheet with low leverage
- Robust and consistent cash flow
While this option may not be available to newer franchise owners, it’s an important avenue to consider as your business grows and establishes a solid financial foundation.
Private Equity
For franchise owners contemplating significant expansion—think 20 to 40 locations or more—private equity can be a viable financing option. This is typically suitable for regional players or very large franchise operations.
Private equity firms provide substantial capital in exchange for an ownership stake in your business. This option is most appropriate when your capital needs exceed what traditional bank loans can provide, often in the range of $10 million or more.
While this option isn’t relevant for most small to medium-sized franchise owners, it’s valuable to understand as a potential future pathway.
Cash and self-funding
Using your own capital to fund growth is an option to have on your radar. Self-funding demonstrates to lenders your confidence in your business and your willingness to assume risk. It can also help maintain lower debt levels, which can be beneficial for your long-term financial health.
Some franchise owners use a combination of self-funding and external financing to support their growth. For example, a lender might finance several new locations, then require the franchise owner to self-fund one or two before providing additional financing. This approach can help you maintain a balanced financial structure as you grow.
Conclusion
Expanding your franchise requires careful financial planning and a clear understanding of your financing options. Whether you’re considering SBA loans, conventional bank financing, private equity, or self-funding, each option has its place in the growth journey of a franchise business.
Our team at Grow America has lenders experienced in franchise financing who can provide valuable guidance as you navigate these options. With the right financing strategy and a solid growth plan, you can turn your expansion goals into reality, building a stronger and more successful franchise operation.