Take note: If you’re an aspiring franchisee, there are several hurdles you will likely have to overcome before you officially start turning a profit.
There’s all the research. The countless interviews with franchisors and fellow franchisees. The act of submitting an application and reviewing the Franchise Disclosure Document (FDD). And that’s just the start.
But one of the most daunting challenges usually revolves around securing the financing needed to buy a franchise. After all, the initial and ongoing money required can quickly add up.
Related: 10 Tips to Go From Employee to Boss, From Franchisees Who Did It
Maybe you have the cash to finance yourself. If not, you might be able to obtain financing from banks, the Small Business Administration (SBA) or private investors.
However, depending on the franchise you want to buy, there might be one lesser-known financing option available to you: Some franchisors offer in-house financing that can be an attractive alternative to other methods.
Related: The 4 Biggest Myths About Franchising
What is in-house financing in franchising?
In-house financing in this context means the franchisor is offering to finance your purchase of their franchise. Rather than going to a bank or other lending institution for your financing needs, you’ll be making payments directly to the franchisor over a set period of time.
Pros of in-house financing
A major advantage of in-house financing is the franchisor might have more flexibility in their lending terms than a traditional lender would. This can include extending the payment period or offering lower interest rates, which can make the financing more affordable and manageable for you as a franchisee.
Another benefit is in-house financing can ease the overall franchising process because you are eliminating a third party in the transaction.
Plus, the franchisor has a direct stake in your franchise — and therefore might be more invested in your success as a franchisee. After all, if you fail, it might not recoup its investment. This can lead to a closer working relationship between you and the franchisor, which could be beneficial in terms of training, support and ongoing mentorship.
Related: Busting Franchising Myths and Choosing the Right Opportunity
Cons of in-house financing
Where there are pros with in-house financing, there are also cons. For one, the franchisor might require a larger down payment than a traditional lender to keep your payments and interest rates low. This can be a significant expense you’ll need to pay upfront.
Another potential downside of making payments directly to the franchisor is you might be limited in your ability to shop around for better financing options. If you were to go to a bank or other traditional lender, there might be an opportunity to negotiate a better interest rate or other financing terms.
In-house financing is more rigid, and you’ll be limited to the terms set by the franchisor.
It’s also important to note that in-house financing might not be available for all franchisees. Smaller franchisors might not have the financial resources to offer this type of financing across the board, or they might prefer to work with traditional lenders instead.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
What to do if you pursue in-house financing
The decision to pursue in-house financing or another financing option will depend on your circumstances. Be sure to carefully consider the pros and cons and to do your due diligence before signing and making a financial commitment.
If you do decide to obtain in-house financing, there are a few tips to keep in mind:
- You should read and understand all of the financing terms before agreeing to anything.
- You’ll want to know exactly what you’re committing to in terms of down payments, regular payments, interest rates and any other fees or charges.
- Be sure to ask questions and seek clarification on anything you’re unsure about. The franchisor should be willing to work with you to ensure that you fully understand the financing arrangement.
Moving forward in your franchise journey
In-house financing can be a viable option for financing a franchise. It offers potential pros like lower rates and a better working relationship with your franchisor. But it might be accompanied by rigid terms and higher down payments.
By carefully considering your options and doing your due diligence, you can make an informed decision that sets you up for success as a franchisee.
Related: Is Franchising Right For You? Ask Yourself These 9 Questions to Find Out.