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How to Get a Business Loan for a Franchise Business

Posted on Mar 14th, 2022
Articles Business Finance Franchising Funding

How to Get a Bank Loan for a Franchise Business

The franchising industry has opportunities for entrepreneurs looking to take advantage of the popularity of fast foods and services like beauty and wellness, education and child care.

While franchising has a lot of advantages, including being a tried and tested system and business model, there are some obstacles for entrepreneurs looking to enter the sector. The first big barrier that potential franchise owners will face is with the high cost. Especially if you have their eye on more well-established and popular brands.

Financing needs

To apply to become a franchisee, business owners will be required to secure financing to cover the franchise costs upfront. This can include the store set-up costs and joining fees, as well as ongoing fees like monthly royalty fees, marketing fees (as a percentage of turnover) and often a volume-based fee.

Loans for a franchise business

To access the financing they need, business owners can approach a bank for a loan. Many of the major banks in the country have a franchise division with a focus on franchise financing. According to the Which Franchise website, a prospective franchisee needs between 40 and 50% “of the total franchise investment in cash or similar unencumbered funds”. The bank will finance the balance if the application is approved.

Types of franchise loans available

Prospective franchisees can apply for a variety of loans to cover their franchise costs, including:

  • Term loans – a lump sum of cash up front, which you then repay, plus interest, in monthly installments over a set period of time e.g 60 months.
  • Working capital funding – boost working capital in a business.
  • Inventory loan – helps businesses to buy stock.

Research your options and get a quote for a business loan HERE

How to get a franchise loan

In the article, A Guide to Fast Food Franchising, Andre Beck, Sector Head: Fast Food and Restaurants at FNB Business, provides a list of factors banks will consider before granting a loan.

  • Detailed franchise description and system.
  • Business plan.
  • FICA and personal balance sheet of all prospective shareholders and sureties.
  • Contract and franchisor approval letter.
  • Detailed description of all set-up costs and estimated cash flow forecast.
  • Own contribution to purchase the franchise and collateral if required.
  • Funding requirements may differ depending on the type of franchise. Banks consider whether it is a new setup or an existing business.

From Nandos to RocoMamas and Candi & Co. Here is a list of 100% South African franchises that aspiring entrepreneurs can look into. See full list HERE.