Business loans for franchises

Franchise loans

Need funds to buy a franchise? Here’s our comprehensive guide to finding competitive financing for your franchise business.

One of the key considerations when buying a franchise is how to access the funds you need. Many lenders are cautious when funding new franchises, so finding the right loan can sometimes be a tricky proposition. Let’s take a closer look at the business loan options available and how to find the right loan for your needs.

Buying a franchise

A franchise is a business where the owners (franchisors) sell their business name, logo and model to independent third-party operators (franchisees). The franchisee is presented with a successful business model and assistance organising and managing their business, and in return they pay a franchise fee to the business owner.

Franchising is a well-established and recognised way of doing business in Australia, employing more than 470,000 people and providing an estimated annual sales turnover of $146 billion. However, finding the right loan to help you purchase a franchise can be difficult. While Australia’s biggest banks have accreditation programs set up that recognise and provide funding to successful franchise systems, not all new franchisees can qualify for this type of funding.

According to Griffith University’s Franchising Australia 2016 report, the average total start-up cost for a new retail franchise unit was $287,500, compared to $59,750 for a non-retail franchise. If you need financing to help cover these costs, read on for information on how to get the right loan to buy a franchise.

NAB QuickBiz Loan Offer

NAB QuickBiz Loan Offer

From

12.95 % p.a.

fixed rate

  • Borrow up to $100,000
  • Get a response in 60 seconds
  • Sole traders, partnerships and companies can apply
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100% confidential application

NAB QuickBiz Loan Offer

An unsecured business loan up to $100,000 you can apply for in minutes.

  • Interest rate from: 12.95% p.a.
  • Interest rate type: Fixed
  • Application fee: $0
  • Minimum loan amount: $5,000
  • Maximum loan amount: $100,000
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Loans you can compare today to finance a franchise

Rates last updated August 15th, 2018
Name Product Min Loan Amount Max. Loan Amount Loan Term Application Fee Product Description
NAB QuickBiz Loan
$5,000
$100,000
1 to 3 years
$0
An unsecured business loan from $5,000 that can be processed in 1 business day.
Valiant Finance Business Loan Broker
$5,000
$1,000,000
0.25 to 5 years
$0
A Small Business Lending Specialist from Valiant Finance can give you access to competitive business loans from over 60 lenders. Loans between $5,000 and $1 million are available. Request a call – your loan can be funded in 1 business day.
Moula Business Loan
$5,000
$250,000
0.5 to 2 years
$0
Small business loans of up to $250,000 approved and funded within 24 hours.
Transparent fees and rates. Note: Business must have been operating for at least 6 months and have monthly sales of at least $5,000.
Spotcap Loans
$10,000
$400,000
0.25 to 2 years
$0
Take advantage of a fixed interest rate and no upfront fees with this business loan, available up to $400,000. Note: Business must have been operating for at least 18 months and have turnover over $200,000.
Lending Express Business Loans
$5,000
$500,000
0.25 to 2 years
$0
Apply online for up to $500,000 and get access to over 25 lenders through Lending Express.
Ferratum Business Loan
$2,000
$150,000
0.5 to 1.5 years
2.5% origination fee
Competitive business loans from $2,000 based on your business’ cash flow.
Prospa Business Loan
$5,000
$250,000
0.25 to 2 years
$0
Apply for up to $250,000 and receive your approved funds within one business day. Note: Businesses must have a turnover of more than $6,000 per month and provide 6 months of trading history or 3 months history if you've purchased an existing business.
OnDeck Business Loans
$10,000
$250,000
0.5 to 2 years
2.5% origination fee
Apply online for up to $250,000 with OnDeck and receive approved funds in one business day. Note: Minimum annual turnover of $100,000 and must be able to demonstrate 1 year of trading history.

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What loan features are important when buying a franchise?

When buying a franchise, you’ll have a number of specific loan requirements, including:

  • Variable loan amounts. As the start-up costs quoted above demonstrate, the amount you need to borrow to buy a franchise varies depending on the business you select and the industry in which it operates. While one borrower might only need a loan of $25,000, the next might need to borrow $250,000.
  • Funds to cover additional costs. In addition to start-up costs, there are several other expenses to consider when running a franchise. Equipment needs to be replaced, business premises require refurbishment and you’ll need access to ongoing working capital.
  • Loan terms of up to 10 years. The loan terms of business loans for franchises are usually linked to the length of the franchise agreement term. This means that terms typically range from 5 to 10 years, but longer terms are available for borrowers who offer their residential property as security for the loan.

What types of franchise finance are available?

Type of loan Features and uses Benefits Drawbacks
Secured business loan
  • Can use your franchise or, in some cases, your residential property as security for the loan.
  • LVRs usually range from 50% to 70% of the finance you need.
  • Loan term is usually limited to length of franchise agreement (if loan secured by business).
  • Longer loan terms available if secured by residential property.
  • Can borrow up to 70% LVR.
  • Easier application and higher chance of approval if applying for a loan to buy a reputable franchise that is accredited with your bank.
  • Partly secured loans also available.
  • If you use your franchise as security, lenders know there is a greater risk of suffering a loss on the loan and will therefore charge higher interest rates.
  • If your franchise is not accredited with the bank, you may need to offer residential property as security.
Unsecured business loan
  • Loan term usually limited to the length of the franchise agreement.
  • Can be used to provide the funding you need to buy a franchise and get it up and running.
  • Lower loan amounts than secured business loans.
  • Access financing without having to put your business or property up as security.
  • Typically hard to access funding.
  • Lower maximum LVR than secured loans (usually 50%).
  • Much higher interest rates than a secured loan.
  • Higher fees apply.
Interest-only business loan
  • Interest-only period of up to two years (or more if you use your home as security).
  • Principal is due when the loan reaches maturity.
  • Used for medium-term funding requirements.
  • Loan is typically secured by property or business assets.
  • Allows you to make interest repayments only while you get your business up and running.
  • Helps overcome cashflow problems when starting a business.
  • Establishment and ongoing fees apply.
Low-doc business loan
  • Designed for borrowers who can’t provide the usual proof of income.
  • Potentially viable if you have a residential property you can use as security.
  • Provides business funding for borrowers who don’t meet the usual lending criteria.
  • Can be hard to access financing.
  • Attracts a higher interest rate than ordinary business loans.
  • Watch out for hidden fees and exit fees.
Line of credit
  • Allows you to draw from an account balance up to an approved limit.
  • Usually used to provide working capital for your business.
  • Usually secured by a residential property mortgage.
  • Access the funds you need at any time (as long as you don’t exceed the approved limit).
  • Competitive interest rates.
  • No minimum monthly repayment required.
  • Application, line and ongoing fees apply.
  • Can put your property at risk if you fail to make repayments.

What to consider before applying for a franchise loan

Consider the following factors before applying for a business loan to buy a franchise:

  • Your own financial situation. Lenders will take your personal financial situation into account when deciding whether or not to approve your loan application. You will need to take stock of your assets and liabilities, as well as whether you are able to offer a residential property as security, before beginning an franchise loan application. Without equity to your name, you won’t be approved for a loan to buy a franchise.
  • Does the franchise have a financing option? Vendor financing is where franchisor offer financial assistance to new franchisees to help them get their business up and running. You then repay this financing in one of two ways: by paying a little extra on your regular royalty payments or by exceeding a pre-agreed level of profits for your franchise. Vendor financing is becoming increasingly common in Australia, so it’s worth checking if such a system is in place for your business before approaching any lenders.
  • How much you need to borrow. As well as initial buy-in costs, you also need to consider the day-to-day costs of running the business. Get a full breakdown of the costs involved from the franchisor and remember to calculate your projected income when working out how much you can afford to repay.
  • Bank accreditation. Some well-established and reputable franchise systems have bank accreditations. This means that because the banks know they are lending you money to buy a business based on a successful model, they will be willing to lend you up to 70% of the purchase price.
  • Ask your accountant. Your accountant is the best person to advise you on how much you can comfortably afford to borrow and repay, as well as advise you on how best to fund your franchise purchase.

How to compare franchise loans

Consider the following when choosing a loan:

  • The interest rate. Not only do you need to consider the interest rate that applies to your franchise loan, but also whether it is fixed or variable and whether it will be calculated on the principal or on the outstanding loan amount.
  • Loan fees. Read the fine print for details on all fees associated with the loan. You’ll need to consider upfront fees such as establishment and application costs, as well as ongoing monthly or annual fees. Additional fees, such as if you top up your loan or make additional repayments, should also be taken into account.
  • Loan amount. How much can you apply for? Is there a minimum loan limit? Make sure that any lenders that you are comparing allow you to borrow the same amount of money.
  • Loan flexibility. Is the loan flexible enough to be tailored to your requirements? For example, can you make additional repayments without incurring a penalty? Can you top up your loan if you need more cash? Make sure you can design the loan so that it suits your needs.

How to apply for a franchise loan

You’ll need to provide a wide range of details to a lender when applying for a business loan for a franchise, including:

  • Business financial information. The bank will want to know some key financial information about the franchise you want to buy, such as details of the business’s cash flow, profitability and sales forecasts. If buying an existing business, you’ll need to provide business tax returns, profit and loss statements and business bank statements from at least the past couple of years.
  • Personal financial information. Next, the bank will need a personal financial statement that shows your own assets and liabilities, as well as recent tax returns and evidence of the equity you have to your name.
  • Your business experience. Do you have prior experience running a franchise or working in the same industry as the franchise you want to buy? If so, this will improve your chances of approval.

It’s essential that you’re organised and that you have a clear plan before approaching a bank for financing. For help putting together a business loan application, as well as assistance comparing the loan options available, contact a broker or ask your accountant for advice.

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