Securing the necessary capital to buy a franchise is an exciting venture. It creates an opportunity to own a business with an enduring framework. It also provides a faster path to success because of its built-in support systems and established customer base. However, it comes with its challenges. Be it risking personal assets, sacrificing control and equity, or struggling to keep up with high interest rates, raising capital can cause thorny issues. In this article, we’ll explore strategic methods for raising capital to purchase a franchise. From SBA loans to angel investors, you’ll learn the essential steps to successfully owning a franchise and securing the capital you need. How a Franchise Model Works A franchise model presents a unique opportunity for entrepreneurs. It gives them the freedom to run their own business while leveraging the power of an established franchise brand. Purchasing a franchise also gives access to the brand name, resources, and the momentum built since the brand’s early days. In return for the franchisee paying upfront fees and royalties, the franchisor provides the expertise, tools, and training for the business to thrive. It’s a beneficial collaboration for both parties. Franchisees get a head start from the previous leg work of an existing business, while franchisors expand their empire through passionate partners. Why Franchise Ownership May Be Appealing According to Budget Blinds, 85% of franchises are still in business after five years. This is a notable contrast to the 45% of small businesses that fail within five years. In addition to its success rate, here are some key advantages that make franchise ownership so appealing: Established brand recognition gives you a head start in the market A proven business model reduces the risk of failure Franchisors provide training, support, and marketing resources Access to a built-in customer base and loyal following Easier to secure financing with a well-known brand Streamlined operations and systems are already in place Lower risk due to established brand reputation and track record How to Purchase a Franchise in 7 Steps 1. Research Franchise Opportunities Explore industries that spark your interest. Whether it’s food and beverage, fitness, healthcare, or education, look into different franchises within your expertise and interests and assess their potential for growth. As you test the field, find a franchise that aligns with your ambitions. This is your chance to step into a thriving business that has the potential for long-term success. 2. Determine Financial Needs Like purchasing a home, buying a franchise comes with a variety of fees and unexpected costs that can arise during the process. This can include: Initial franchise fee Royalty fees Marketing fees Training fees Renewal fees Equipment and supply fees Legal and administrative fees Site development fees (if applicable) As you secure funding, take every financial detail into account to avoid running out of steam before your franchise even takes off. 3. Meet with Franchisors Trust is a major factor when it comes to making a large investment. Therefore, don’t hesitate to request extensive information (such as proformas and business plans), schedule meetings, and ask detailed questions about the business model and support system. 4. Conduct Due Diligence As you take the time to speak with current and former franchisees, aim to get an honest perspective on their experiences. Carefully review the Franchise Disclosure Document (FDD) to understand the franchise’s terms, fees, and potential risks. Additionally, gauge the company’s reputation, both in the market and among franchisees, as you don’t want to discover a wolf in sheep’s clothing. 5. Secure Financing From personal savings to crowdfunding, determine how you’ll fund your franchise. Explore options like traditional bank loans, SBA loans, or even home equity. Some franchisors also offer in-house financing to help cover startup costs. More on this below! 6. Sign the Franchise Agreement Since franchising in the U.S. is regulated by the Federal Trade Commission (FTC), it’s essential to comply with all legal requirements. Seek legal advice (if necessary) to make sure you fully understand the terms, responsibilities, and potential risks. Once you’re satisfied and legally in the clear, you can move forward and sign the contract, officially becoming a franchisee. 7. Complete Training and Launch After it’s official, complete the training program required by the franchisor to learn the ins and outs of running your franchise. Then, prepare your territory (whether physical or digital) and ensure everything aligns with the franchisor’s brand standards. 8 Ways to Raise Capital for Buying a Franchise 1. Personal Savings Using personal savings to buy a franchise means directly investing your own funds keeping full control without taking on debt. It allows you to start your business without relying on external financing. However, it requires having enough capital on hand to cover the initial costs. Pros No debt, which means no loan repayments or interest Full ownership and control over your franchise Immediate access to funds without waiting for loan approval Cons Drains personal savings, leaving less for emergencies or other investments Risk of tying up all your capital in a single venture Limits the size of your investment if your savings are insufficient 2. Bank Loan A traditional bank loan provides access to significant capital without dipping into your own savings. However, you’ll need to repay the loan over time, and interest charges can add up quickly and put a strain on your finances. Pros Provides immediate access to large amounts of capital Allows you to preserve personal savings for other needs Fixed repayment schedules can make budgeting easier Cons Requires repayment with interest, increasing the total cost Approval can be difficult, especially with strict credit and collateral requirements Loan payments reduce cash flow and may strain finances early on 3. SBA Loan An SBA loan is a government-backed loan offered through the Small Business Administration, designed to help small business owners (including franchisees) access funding with more favorable terms. 7(a) loans have a maximum loan amount of $5 million. Pros Lower interest rates and longer repayment terms Backed by the government, reducing risk for lenders Easier to qualify for compared to standard business loans Cons Lengthy application process with extensive paperwork Strict eligibility requirements, including strong credit and collateral Approval and funding may take longer than other financing options 4. Franchisor Financing Franchisor financing is when the franchisor offers in-house funding options to help franchisees cover initial costs—such as franchise fees, equipment, or setup expenses. This financing makes it easier for new franchisees to get started while staying aligned with franchisor business models. Pros Easier approval process compared to traditional loans Flexible terms that are often designed to support franchisee success Financing is tailored to the specific needs of the franchise Cons Interest rates may be higher than other financing options Limited flexibility in choosing your financial structure You may still need additional financing to cover all startup costs 5. Home Equity Loan A home equity loan allows you to borrow against the value of your home, providing significant capital at a lower interest rate than most other loans. However, it comes with the risk of losing your home if you’re unable to make payments. Pros Lower interest rates compared to traditional business loans Access to a large amount of capital based on your home’s value Fixed interest rates and repayment schedules make budgeting easier Cons Puts your home at risk if you can’t make repayments Ties up personal assets, limiting financial flexibility The application process can be lengthy and requires significant documentation 6. Angel Investors Angel investors are affluent individuals who provide substantial funding in exchange for equity or a stake in your franchise. The advantage is that they can offer financial backing and valuable experience and guidance. However, partnering with an angel investor often means losing some control or ownership of the business. Pros Access to significant capital without taking on debt Investors often bring valuable expertise and mentorship Flexible repayment terms or no repayment at all if equity is exchanged Cons You may need to give up a portion of ownership or decision-making power Potential conflicts if the investor’s vision differs from yours Finding the right investor can be a lengthy and competitive process 7. Crowdfunding Crowdfunding involves raising money from a large group of people, typically through online platforms, to fund your franchise. This method can help you cover startup costs without taking on debt. However, extensive marketing efforts are required to attract supporters. Pros Access to funding without taking on debt or giving up equity Builds community support and brand awareness before launch Can serve as a way to validate your business idea in the market Cons Requires a strong marketing campaign to gain traction Success isn’t guaranteed, and it can be time-consuming Funds raised may fall short of what’s needed to cover costs fully 8. Retirement Funds (ROBS) Rollovers for Business Startups (ROBS) allow you to use funds from your retirement accounts, such as a 401(k), to invest in a franchise without facing early withdrawal penalties. While it provides access to substantial capital, it involves stringent legal and tax requirements to set up. Pros Access to significant capital without taking on debt or incurring penalties No monthly loan repayments or interest Allows you to invest in your business using your own funds Cons Complicated setup process with strict legal and tax regulations Puts your retirement savings at risk if the business fails Requires ongoing compliance to avoid penalties or disqualification Conclusion Whether it’s choosing a small business loan, launching a crowdfunding campaign, or pursuing traditional bank lending, raising a significant amount of capital can feel like trying to grow a garden in the desert. However, with the right approach, there are tried-and-true methods to secure the funding you need. The key question is: which option aligns best with your current situation and long-term goals? While reading and researching online can provide valuable insights, there’s something irreplaceable about face-to-face networking. And often, the best answers come from real conversations with those who’ve been there and done that. That’s why at the Small Business Expo, we take pride in presenting America’s largest networking events for business owners, entrepreneurs, and start-ups. Led by industry experts, guests receive valuable insights on building, managing, and financing successful businesses, meanwhile connecting with ambitious peers who could be their next partners!