June 25, 2019 | Last Updated on: June 16, 2023
It might seem like a no-brainer to buy into the fast-food franchise with more United States locations than any other. But before you sign your franchise agreement and start getting your business loan application together, you should pause for these 5 important considerations. Getting a Subway franchise loan is not as simple as you may think. But if you follow these 5 steps, getting a Subway franchise loan can be made simpler.
According to the Subway website’s FAQ, there are over 21,000 Subway franchisees operating locations all over the world. And what makes Subway unique among franchise restaurants is that those franchisees own every single location. The company itself doesn’t own a single restaurant.
What the company does instead provides closely regimented guidelines for every part of the process. There’s a Site Selection team to help you find prime real estate, a Store Design team to help make sure new buildings fit the company’s standards, and Development Agents, who are the company’s boots on the ground, helping to decide which prospective franchisees are the best fit.
So if you’re comfortable with relinquishing some control of your sandwich shop, working with Subway could be an excellent choice.
You’ll need a considerable amount of capital to buy a Subway franchise. The initial franchise fee alone will run you $15,000 in the United States and Canada. And there’s another entire checklist of expenses you should review before you start applying for a small business loan to buy a franchise.
You’ll need opening advertising, a deposit for equipment, a security system, training, real estate, and inventory. That’s not even taking excess working capital into account. Subway’s franchise brochure estimates you should have anywhere from $92,000 to well over $300,000 on hand. And those sums don’t even include exterior renovations. Your initial loan amount should be able to cover all those expenses, plus your employees’ wages and more.
Once you do get a loan, you still need to remember there’s an entire process involved. You need to wait to hear if the company thinks you’re the right fit too. Even after you’ve signed, the whole process takes, at minimum, 2 months to a year.
The money going back to the company doesn’t end at your initial investment. You’ll be responsible for the upkeep of your physical location, of course. But you’ll also be paying 12.5% of your gross sales to the company. Most of that fee (8%) is your franchise royalty fee, while the rest (4.5%) is an advertising fee.
In exchange, you’ll receive everything from new products to operational systems, training, and more. But it’s an important consideration to make, particularly as you’re preparing to apply for a franchise loan. You need to make sure you’re ready to pay that fee every month.
Unless you have a spare 6 figures lying around, you’ll likely want to apply for some form of franchise financing. And the reality of applying for that loan is that you’re going to be judged on your financial health. So before you own a Subway restaurant, you’ll need to do some serious accounting of your worthiness as a borrower.
Take a look at your credit score. Remember that 12.5% of your gross sales will be going toward royalty fees and advertising fees. Do you have the wiggle room to be paying sky-high interest rates on your business loans?
Consider anything you can do to improve your credit score. Can you pay off a long-standing debt? Can you get an increase in a card’s credit limit? Even opening an additional credit account can help your credit score, since you’ll have even more credit available.
But your credit score isn’t the only number or factor lenders will look at when considering you as a possible borrower. You need to carefully examine your business plan. The nice thing about a huge franchise like Subway is that there are thousands upon thousands of past and current franchise owners providing advice, case studies, best practices, and more. You can speak to current owners. Ask them what they did right and what they did poorly when they were first starting up. Integrate that knowledge into your business plan.
Once you’re sure your business plan is ship-shape and you’re confident you’ll be a great business owner in such a competitive field, you should begin thinking about which specific type of loan is best for you.
The most popular type of loan used to buy franchises in the United States government-backed Small Business Administration (SBA) loan. Because the government guarantees up to 75% of the loan’s amount to the lender, these loans are seen as less risky. They’ll typically come with lower interest rates, but fairly strict guidelines about borrower eligibility.
You don’t necessarily have to use an SBA loan, though it can be a great advantage to do so. You can also use a variety of other loans, some at the same time.
You could get a traditional term loan to pay for the real estate or construction costs, then acquire an equipment loan to pay for the refrigerators, proofers, and ovens required for the day-to-day operations of a Subway sub sandwich shop. You could even finance your equipment through Subway’s equipment leasing program.
There are as many ways to pay for your restaurant franchise as you could think of. A Subway franchise business loan can come in many forms.
Many people dream of owning their own business, and that business might not necessarily involve the sort of strict guidance you get when you take advantage of a franchise opportunity. It can be a difficult business model to follow for some people, who may crave more independence in their business decisions. But remember that working with a franchise can set you up for success. Particularly a franchisor that’s globally recognized, like Subway.
Interested in learning about other popular franchises that you can start? Check out this article from Biz2Credit on the best restaurant franchises to start.
