Best Funding Strategies for Buying a Restaurant Franchise

Do you want to open a new restaurant brand but avoid the risk and stress of developing a concept and launching it on your own? Opening a franchise restaurant or purchasing an existing franchise could be the perfect business model for you. It offers you the chance to be an entrepreneur and utilize franchise opportunities with the security of being backed by an established corporation and a proven restaurant concept.

Investing in a restaurant franchise, especially a well-known established brand, can be costly. Most franchisees have to depend on some form of business financing to get established. This article will explain the restaurant franchise financing options available to entrepreneurs interested in buying a restaurant franchise and the pros and cons of each.

Business Financing Programs for Buying a Restaurant Franchise

The first place to look for financing when buying a restaurant franchise is through the franchisor itself. Many fast-food chains including Marco Pizza, A&W, McDonald’s, and DQ Grill & Chill, offer financing directly or through business loan companies approved by them. Not all restaurant franchise companies offer initial investment, whereas some only provide loans for limited uses like upfront startup costs, equipment financing, working capital, or real estate development. However, most lenders won’t cover or approve funding for a franchise down payment or franchise fees. You’ll have to cover these with your retirement funds, investments, or other savings. Still, it’s worth checking to see if your franchisor offers funding before looking at other options.

Franchisor financing agreements differ when it comes to buying a restaurant franchise. Some can take on as much as 75 percent of the debt burden from a new franchise owner. Others finance a much smaller percentage. Some agreements may allow deferred or reduced payments while the franchise restaurant is in start-up mode. Always have your business attorney or accountant review the terms of both your franchise agreement and financing documents. Make sure you understand and are comfortable with all aspects of the franchise disclosure document (FDD) and any loan paperwork. If not, ask questions until you feel confident about accepting both.

Pro: Franchise financing programs are typically the easiest way to get funding for your new franchise business.

Con: Not all franchise companies offer financing for buying a restaurant franchise, and if they do, the money might not be able to be used for all expenses. Also, it’s a good idea to shop around to ensure you get a loan with a low-interest rate and fair repayment terms.

Traditional Bank Loans

Another common option for buying a restaurant franchise is a term loan from a traditional financial institution. A term loan is what most people think of when it comes to loan financing, especially if you’ve ever taken out a mortgage or student loan.

Funds from this type of small business loan can be used for almost any purpose. If approved, you’ll receive a lump sum of cash to use as capital for your franchise startup, then pay back the loan with interest on a set payment schedule.

Traditional bank loans are an excellent way to secure capital because they come with relatively low-interest rates and reasonable repayment terms compared to other types of loans from different providers. However, to qualify for a large amount of money, you will need a nearly perfect credit score and a strong business track record, which is also likely a requirement for how to buy a franchise restaurant, especially a competitive national one.

You’ll also have to undergo an extensive application process, including providing bank statements, financial statements, tax returns, a complete business plan, and more. The bank will check your personal credit score and business credit history as part of the loan underwriting process. Many of these things, along with your net worth and other personal financial information, will also be required as part of your franchise application process, so you probably have to prepare and gather these documents anyway.

The lender uses all this information to assess your creditworthiness. In short, the bank is trying to figure out whether you can reasonably afford to repay the loan you’re requesting and how likely they are to get their money back with interest. The stronger your business and financial history and credit score, the more likely your application will be approved and the better the terms and interest rate you’ll receive.

One other important thing to be aware of is that a traditional bank will likely require you to put up business collateral and a personal guarantee to back your loan. If you put up collateral or make a guarantee, the bank can take your business and personal assets if you miss making your monthly loan payments.

Pro: Loans from traditional lenders come with attractive interest rates and loan terms.

Con: The application process for bank loans is challenging and time-consuming, and only the most experienced businesspeople with top credit scores qualify.

U.S. Small Business Administration (SBA) Loans

SBA loans, especially the popular SBA 7(a) loan, are among the most appealing financing options for aspiring food service franchisees. The loans are backed up to a certain percentage by the Small Business Administration. The application and funding process comes from intermediary lenders approved by the agency.

These loans are similar to traditional term loans from a bank or alternative lender. The difference is that the SBA reduces the risk to lenders by guaranteeing a percentage of the total loan amount. This incentivizes lenders to provide more loans with lower interest rates and longer repayment terms to solid small business owners than they otherwise would.

The qualification standards for SBA loans are stringent, and applications take a long time to process, typically weeks or months. You must have very good credit to qualify for an SBA loan. If you have time on your side and possess strong credit and business records, an SBA loan can be an excellent funding option for how to buy a fast-food franchise. If not, it could just be a waste of your time.

Pro: SBA loan guarantees help lower lender risk, resulting in reduced interest rates and more favorable terms compared to most other loan options.

Con: The SBA loan application and underwriting process is a long one, and the requirements to get approved for the loans are very stringent.

Online Alternative Lenders

If you need quick cash to buy a fast-food franchise or wish to secure additional capital to supplement a traditional term loan or SBA loan, consider applying for franchise funding through an alternative lender. These options include short-term loans, equipment loans, and commercial real estate loans.  Business lines of credit and other funding solutions from online lenders can help keep your franchise restaurant properly funded and operational over time. Business lines of credit work similarly to home equity lines but provide funds specifically to address business cash flow issues.

The difference between alternative online lenders and traditional ones is that they use an expedited online application process and have less strict approval standards. That means you are more likely to get approved quickly for buying a restaurant franchise. In many cases, you could get your loan money deposited into your bank account in as little as one business day.

Alternative loans tend to come with higher interest rates and offer shorter repayment terms and lower loan amounts than ones from traditional banks. However, it may be worth it if you need to supplement your current financing, aren’t able to qualify for a bank or SBA loan or need cash fast to fund some aspect of your franchise restaurant business. Loans from alternative lenders can also be acquired must faster.

Pro: Faster approval and funding compared to traditional banks, making it ideal for franchisees who need quick access to capital.

Con: Higher interest rates and fees, which can increase the overall cost of financing.

Crowdfunding

If financing isn’t available through your franchisor for buying a restaurant franchise, or you can’t get approved for bank, SBA, or alternative loans, you may need to get creative. One way to do this is to consider crowdfunding.

You could set up and promote your own crowdfunding page. Or you might partner with an organization that crowdfunds for franchises and other businesses. Some websites crowdfund specific firms and industries, then lend money to small business owners who need financing.

Pro: Crowdfunding can be a sound financing option if you have credit and financial history issues and aren’t satisfied with the financing, you’re able to qualify for it.

Con: It could be challenging to get as much financing as you need through crowdfunding. Top food franchises to own can be expensive compared to independent restaurants.

Friends and Family

One of the most common ways to own a franchise restaurant, especially lesser-known local fast-food franchises, is by borrowing from family. Whether you get a loan, ask for a gift, or bring someone on as your business partner, financing your own business from friends and family members typically comes at a fair cost and with reasonable terms. However, many of these situations result in lost friendships and family disagreements if the franchise restaurant owner can’t pay the money back.

If you decide to accept cash from friends or family, write up contracts that include repayment terms and expectations on both sides. If everyone understands the agreement before signing, disagreements will be less likely in the future.

Pro: Getting funds for buying a restaurant franchise from your support system like family members and friends is relatively easy and inexpensive.

Con: You could destroy essential relationships in your life if you fail to repay a loan.

Final Thoughts

Bottom line, securing financing for buying a restaurant franchise requires careful consideration of your options. Whether you choose franchisor financing, traditional bank loans, SBA loans, alternative lenders, crowdfunding, or support from family and friends, each funding route comes with its own set of advantages and challenges. The key is to assess your financial situation, creditworthiness, and long-term business goals before committing to a financing solution. With the right funding strategy in place, you can turn your dream of owning a franchise restaurant into a reality.

Ready to take the next step? Explore your financing options today and start building your best restaurant franchise to own!

Frequently Asked Questions About Buying a Restaurant Franchise

Can I get a loan to cover the franchise fees and down payment when buying a restaurant franchise?

When buying a restaurant franchise most lenders, including banks and SBA loan providers, do not cover franchise fees or down payments. You may need to use personal savings, investments, or alternative financing options like a home equity loan or funds from family and friends to cover these costs.

Do all franchisors offer financing for buying a restaurant franchise?

No, not all franchisors provide financing for buying a restaurant franchise. Some offer partial funding or work with approved lenders, while others leave financing entirely up to the franchisee. Always check with the franchisor before exploring other loan options.

Is crowdfunding a viable option for buying a restaurant franchise?

Crowdfunding can work, but it’s not always reliable for raising large amounts needed for franchise investments. Some platforms specialize in business crowdfunding, but success depends on marketing efforts and community support.

What kind of collateral do banks require for franchise loans?

Banks may require business collateral, such as restaurant equipment or property, and a personal guarantee. This means if you default, they can seize your assets to recover the loan amount.

What are the risks of borrowing from family and friends for buying a restaurant franchise?

While borrowing from loved ones may be cost-effective, it can strain personal relationships if repayment terms aren’t clearly defined. To avoid conflicts, create a written agreement outlining repayment expectations when buying a restaurant franchise.

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