tarting a franchise business is an appealing option for many entrepreneurs because it allows them to capitalize on the strengths of an established enterprise. Buying into a franchise offers the benefits of brand awareness, an existing customer base, and proven products and services—all of which enhance the chance of success. Plus, the franchisor that sells the license to the franchisee offers support in the form of training, materials, process flows, and branding to make it easier to get the business off the ground. Ultimately, operating a franchise in a popular category like a restaurant (McDonald’s or Subway), retail (Value Village or The UPS Store), real estate (Keller Williams), or wellness (Planet Fitness or Massage Envy) can generate more probable success and long-term returns for franchisees.

Not surprisingly, there is growing interest in franchise businesses, according to the International Franchise Association (IFA). The IFA’s 2023 Franchising Economic Outlook indicates that “franchise unit and job growth continues to outpace pre-pandemic levels, delivering jobs and business ownership opportunities across the United States.” Service-based industries and quick-service restaurants are expected to experience higher growth than other industries. The overall number of franchise establishments will increase by almost 15,000 units in 2023 (1.9 percent) to 805,000 units in the United States, the IFA report reveals.

Buying into a franchise can be daunting, however, and cost prohibitive. Start-up costs range from $20,000 to $1 million, depending on the brand and real estate requirements, according to the IFA. In addition to the initial fee, franchisees often must pay franchisors ongoing royalties—typically 4 to 12 percent—and sometimes a flat monthly fee.

Fortunately, various franchise funding options are available to help entrepreneurs realize their dreams, including traditional bank financing or US Small Business Administration (SBA)-guaranteed loans. While many franchise businesses may be classified as startups, some are expanding on an existing operation and need money to remodel a space, acquire equipment, or purchase other property, according to Joe Donahue, a commercial loan officer at First National Bank Alaska (FNBA). In addition to offering loans to address these needs, FNBA provides lines of credit and other solutions when warranted. “We tailor financing solutions to meet our customer’s unique needs,” Donahue says.

Sometimes the potential franchisee does not have sufficient collateral for traditional financing, or FNBA has to underwrite more of a projected cash flow or business plan for the borrower, Donahue says. Consequently, the bank may partner with a third party like the SBA, Evergreen Business Capital, or one of the newest funding sources, the State Small Business Credit Initiative (SSBCI), administered by the Alaska Small Business Development Center (SBDC). The Alaska SSBCI uses approximately $60 million from the US Department of Treasury to finance incentives to help drive private-sector funding to Alaska’s small businesses. The program endeavors, in part, to stimulate investments in startups that have historically struggled to receive funding.

As a full-service commercial bank, Northrim Bank also offers a range of financing options to assist franchise businesses, including term loans, lines of credit, equipment loans, and accounts receivable purchasing. The bank has no preferences in terms of providing funding for any specific kinds of franchises or industries. In the past, Northrim has funded businesses ranging from retail, restaurants, and ice cream shops to insurance agencies, mortgage companies, and other financial services companies. “Every business has its own niche,” says Northrim Bank Commercial Loan Officer Timothy Breeden.

Franchise businesses also have a unique positive attribute that makes them appealing to lenders: support from the franchisor. Breeden says, “What I like about franchise businesses is the franchise provides additional support in marketing, framework, and key performance indicators that the specific business can use to measure its success and profitability. In addition to all the systems and components that make the franchise successful, there’s coaching from other successful franchisees in other markets.”

The process for securing franchise financing is not unlike general loan applications, although it is greatly influenced by what is contained in the franchise agreement. Whether the borrower is “kicking the tires” or already bound to the franchise, it would be highly useful for them to obtain a copy of the franchise agreement, Breeden says. Generally, the agreement provides a framework of what’s compulsory for the business, and the bank would like to see the requirements, what percentage of revenues translates to royalties, and where the business has leeway. “For example, the framework for the franchise in the United States may not accurately reflect the pricing and requirements in Alaska,” he explains. “We want to make sure there’s some flexibility and our borrower can still generate a profit and still pay back our loan.”

While there are multiple steps in the loan process, it’s not as daunting as loan applicants might think, Hunnings says. The first step is to discuss the borrowers’ goals and needs and then assess what options are available. The second step is where the bank delves into the details, and the process evolves from there.

“Each application is unique, and it is my role to walk the borrower through every step from that very first conversation to closing the loan,” Hunnings says.

The specific eligibility criteria for franchise financing are also similar to that of a conventional business loan. While most banks base loan decisions on the five Cs of credit—character, capacity, capital, collateral, and conditions—Northrim also weighs the general principles of idea, management, and capital. Breeden explains: “Is it a good idea, something people will need and pay for? Are they providing a service that is useful? Do the owners have management experience, or do they need additional partners to bridge that gap, such as a good attorney or CPA [certified public accountant]? Capital is where the bank comes in.”

Every bank has its own credit policy that outlines specific lending criteria, and the SBA has eligibility and underwriting requirements for all lenders in its standard operating procedure (SOP). Both documents outline specific detailed eligibility requirements for loan applicants. But from a very high level, Wells Fargo is a common-sense driven lender, according to Hunnings. “We want to figure out a way to help, but obviously stay within our credit policy and SOP,” he says. “The key things we are looking for is good credit, a solid résumé showing business experience, and solid liquidity. There is certainly more involved, but these three factors are foundational for success.”

Collateral makes a great addition to a loan package, if it’s available. While conventional loans typically require collateral, Hunnings says, SBA loans can offer flexibility, which is beneficial for some small business owners who might not have collateral. “That’s one of the reasons the SBA products are often a great solution for franchise lending, where many transactions involve a leasehold scenario and include funding for working capital and franchise fees,” he says. “In general, sharing the risk with the SBA allows the lender to take the focus off the lack of collateral and instead focus on repayment or cash flow. In terms of what assets are acceptable collateral, it can include both business and personal assets, but most common in franchise lending are real estate and equipment.”

In addition to looking at tangible assets for collateral, lenders can also consider non-physical assets like patents, copyrights, good will, and trade secrets that could be liquidated in a worst-case scenario for loan repayment. “What surprises many borrowers—especially with the SBA and larger deals—is the SBA may take a lien against a borrower’s personal assets if they determine there is a collateral deficiency with available personal asset equity,” Donahue says. “Where it gets sticky is when you have multiple investors with different backgrounds as loan applicants. Then a determination is needed as to who pledges what for collateral to keep their participation fair and equitable. But as long as they are closely held entities and assets, that’s an easier conversation to have.”

In addition to the normal due diligence, FNBA conducts research on the franchise itself. In part, the bank wants to determine if the franchise is growing, restricted, and has longevity. “We also research the industry to see how it’s performing nationally and locally,” Donahue says.

Similarly, Breeden emphasizes the importance of assessing the franchise business. This includes confirming that the franchisee is approved by the franchisor before the loan is funded. It also involves exploring how other franchise locations are operating in different markets. However, every business has a niche and every area is different. That’s why Northrim relies on local experts to assist prospective franchisees. “We want to see that the business is set up for success,” Breeden says.