Opening a new franchise location comes with far more expenses than you might think. It’s arguably much more expensive than, say, opening an independently-owned restaurant or adding a second location to a retail store. Owners of new franchise locations must deal with a number of absurdly high fees that owners of more common business models will never see. These fees are mandatory, regardless of how the owner of the new location wants to run his or her business.
For most franchises, for example, there is a fee for simply opening a new location. It can be paid in a lump sum or installments and may amount to anywhere from $25,000 to $75,000. Once the franchise is open, the parent company or “franchisor” begins collecting royalty and advertising fees in the form of a percentage of weekly sales. According to NerdWallet, the owner of a Subway franchise must pay 8% a week in royalties and 4.5% a week for advertising.
All of this comes on top of standard expenses like remodeling, taking on new hires, equipment and monthly bills.
THE PROBLEM WITH BANKS
You can probably understand why new franchise owners are 15% more likely than other new business owners to apply for additional funding. New franchise owners tend to seek banks for help because they have worked with them for many years. Banks traditionally favor franchises that have already proven successful but no matter how much revenue the other locations are raking in, the small business loan application could very well be rejected after the bank reviews the new franchise owner’s net worth and credit history. The new franchise owner would also have to provide collateral, as if opening a business wasn’t unnerving enough. Monthly payments would begin immediately, and the bank’s generic, non-negotiable terms do not account for the dips in cash flow almost all franchises are bound to experience.
But it’s 2017, and new franchise owners now have much more cost-effective and stress-free source of funding. Business financing companies like United Capital Source offer funding programs specifically tailored for the difficulties of opening a new franchise.
Here’s a few reasons why new franchise owners should consult alternative business lenders rather than banks for additional funding:
1. SECURING THE RIGHT LOCATION
Location plays a major role in the success of any business but franchises must be far more aggressive when it comes to securing the perfect spot. The location in question must be within the vicinity of the franchise’s target demographic, have access to ample parking, and be situated on a main road near other businesses that generate foot traffic.
In fact, some franchise owners might even say that the key to success is simply opening as many locations in busy areas as possible. Franchises strive to be more accessible than their competitors since this is the main factor that separates them. So when potential owners of new franchises learn about openings for desirable locations, they must pounce on this opportunity immediately. But if the new franchise owner were to ask the bank for a loan, he or she would have to spend days if not weeks collecting the necessary paperwork and filling out the application. The applicant would have to wait months just to hear whether or not approval has been granted and then wait double that amount of time to receive funding.
2. A MUCH MORE CONVENIENT OPTION
Applying for funding from an alternative business lender, on the other hand, is as simple as filling out a one-page application and gathering a minimal collection of financial documents. Collateral and an impressive credit score are not required because alternative lenders judge applicants almost exclusively by the performance of their businesses. Approval can therefore be granted in as low as 24-48 hours, with funding arriving in your bank account just days later. The initial costs of opening the location would be covered, and securing the new location with a down payment is just one of them.
Alternative lenders are also able to offer flexible terms, which is extremely advantageous considering the amount of upfront capital expenses new franchise owners are faced with. These expenses fluctuate month-to-month but most new franchise owners need more and more funding throughout their first year of business. Making regular payments becomes even more difficult thanks to seasonality, or the increasing or decreasing of revenue during certain times of the year. Seasonal businesses could use additional funding to prepare for the busy season and survive the slow season, when sales are down.
3. GET CASH FAST WITH FLEXIBLE TERMS
An ideal loan program for seasonal franchises is a Business Line of Credit or a Merchant Cash Advance, which supplies a lump sum in exchange for a percentage of future credit card sales. Repayment is not on a fixed schedule and is based on future revenues, meaning you can take out the loan during the slow season and eliminate concerns about bills, payroll, etc.
Another franchise-geared loan program offered by alternative lenders is an SBA Loan, or more specifically, the 7(a) loan. Thousands of franchises from Ace Hardware to Papa John’s Pizza have used SBA Loans to open new franchise locations. SBA Loans carry some of the lowest APRs on the market, especially for business models that have already proven successful. Once your franchise is on the SBA’s franchise registry, the SBA can process your loan application much faster than other new businesses because the franchise’s agreement policies have already been reviewed by the SBA.
The business financing experts at United Capital Source have years of experience helping franchises expand to new locations. Previous borrowers include Burger King, the UPS Store, Subway and Dunkin’ Donuts. These businesses are now serving customers all across America and maintaining their reputations for accessibility and speedy service. If you want to add yourself to UCS’s dozens of franchise clients, call 855.933.8638 or visit the UCS website. Our team is ready to find the right program for your individual needs!