Business loans for franchises

Need funds to buy a franchise business? Compare your franchise finance options now.

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Ever been in your favourite fast food chain or retail shop and wondered what it would be like to own and operate a location of your own? You’re not alone. There are over 76,000 franchises across Canada – that’s roughly 1 franchise for every 500 people!

Franchising is a very popular business model, giving you access to a developed brand, an established customer base, and predetermined products and pricing. But this doesn’t come cheaply. Find out what you need to know about financing your franchise business below.

Compare franchise loans

Name Product Interest Rate Min. Loan Amount Max. Loan Amount Loan Term Minimum Revenue Min. Credit Score Filter Values
SharpShooter Funding Business Loan
5.49% - 22.79%
$1,000
$300,000
6 months - 5 years
$5,000 /month
450
SharpShooter Funding offers loans up to $300,000 for small business owners who have been business for at least 100 days and can show a minimum of $5,000 in monthly deposits ($60,000/year).
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Representative example: Jillian buys a cleaning franchise

Jillian has been working independently as a cleaner in Ontario for about 5 years but has found herself struggling to compete with the larger, franchised cleaning services that have begun offering services in her area. After reading about the benefits these franchise owners receive – including liability protection and free marketing – Jillian decides to quit working independently and purchase a franchise of her own.

Besides paying $500/month in royalties, she’ll have to pay a $35,000.00 franchise fee + 13% HST upfront. This includes the base cost of the business, a transfer fee for reviewing her application and orientation/training costs. While Jillian feels confident her existing clientele is large enough to cover the monthly royalties, she needs help paying the franchise fee and sales tax.

Jillian applies for a business loan from an online lender. Thanks to her solid credit score, she is approved for a loan of $39,550.00 with competitive terms. She signs the loan documents, and the funds are deposited into her account within 2 business days. Note that, as a GST/HST registrant, Jillian can treat the HST she paid as tax deductible on her next business tax return.

Cost of purchasing a cleaning service franchise$35,000.00
Loan typeBusiness loan (term loan)
Loan amount$39,550.00
Interest rate (APR)7.90%
Loan term5 years
Additional feesOrigination fee of 3.00% ($1,186.50)
Monthly payment$800.04
Total loan cost$48,002.40

*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.

Buying a franchise

A franchise is a business where the owners, called franchisors, sell their business name, logo and model to independent third-party operators, called franchisees. The franchisee is given access to an established business model, as well as assistance organizing and managing their business. In return, they pay a franchise fee to the franchisor.

Franchising is a well-established and recognized way of doing business in Canada, employing more than 1.5 million people and providing an estimated annual sales turnover of $100+ billion.

However, finding the right loan to help you purchase a franchise can be difficult. While Canada’s biggest banks have franchise financing options, not all new franchisees qualify for this type of funding. Understanding your likely costs is an important part of planning your franchise business and will determine the type and size of financing you need.

The average total startup cost for a new franchise typically runs between $150,000.00 and $200,000.00, with the average initial franchise fee running around $25,000.00. Of course, some popular franchises can run well over $1 million.

Top 10 Canadian franchises

Take a look at the following popular franchises, which are ranked based on locations and startup costs.

RankFranchise
IndustryFranchise feeEstimated total startup costs
1Tim HortonsCoffee shop/fast food$50,000$1 million+
2SubwaySandwich shop$15,000$120,000+
3McDonaldsFast food$45,000$1 million+
4Jan-ProCleaning$3,150$50,000+
5A&WFast food$20,000 – $30,000$900,000+
6RemaxReal estate$12,500 – $28,000$40,000+
7Pizza PizzaFast food/delivery$30,000$350,000+
8KFCFast food$45,000$750,000+
9Dairy QueenIce cream/fast food$25,000$400,000+
10Country StyleRestaurant$35,000$430,000+

These numbers are accurate as of September 2019
What are the most successful franchises in the world?

Decisions to make before getting financing

  • The amount you need to borrow. As the startup 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, and lenders will have certain limits on how much you can borrow. Some franchisors also require that you use a certain level of your own equity when buying a franchise, refusing to approve a franchise that’s completely funded by business finance.
  • Funds to cover additional costs. In addition to startup 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. So while your loan may cover your initial franchise fees, you will also need to budget for these additional costs to avoid cash flow issues down the line.
  • The loan term. When applying for a business loan for your franchise, you may be able to link it to the length of the franchise agreement term. This means that terms typically range from 5-10 years, but longer terms are generally available for borrowers who offer their residential property as security for the loan.

What types of franchise financing are available?

Type of loanFeatures and usesBenefitsDrawbacks
Secured business loan
  • Can use your franchise, or in some cases, your residential property as security for the loan.
  • High loan-to-value ratios (LVRs).
  • 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 potentially borrow up to 100% 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 cash 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 harder to get funding.
  • Lenders usually offer around $100,000.00 at most.
  • 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.

Other types of financing

  • The franchisor. Many franchisors have in-house financing for specific amounts of debt. Franchisors typically specify how much you can borrow, the length of your repayment term and other conditions of your loan, which can vary greatly between companies.
  • Canada Small Business Financing Program (CSBFP) Loan. These loans can be applied for through a chartered bank, credit union or a caisse populaire and are at least 75% backed by the Government of Canada. Your business must make under $10 million in revenue annually to be eligible for this program. Though you can’t pay your franchising fees with this loan, you can use it to purchase any equipment, land, vehicles, etc.
  • Equipment leasing services. Depending on the franchise, you may need to invest in expensive equipment. Most of the time, these pieces are available to lease through the franchisor, but you may need to seek out a third-party supplier if not.
  • Venture capitalists and angel investors. While these avenues are generally thought of for unusual or experimental startups, you could obtain funding for franchising as well. However, investors require surrendering a percentage of ownership to the person or people providing you financial assistance. Compare business loans versus investors in our guide here.

Points to consider when you apply 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’re able to offer a residential property as security, before beginning a franchise loan application. Without equity to your name, you may not be approved for a loan to buy a franchise.
  • Does the franchise have a financing option? Vendor financing is where the franchisor offers financial assistance to new franchisees to help them get their business up and running. You then repay this financing in 1 of 2 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 Canada, so it’s worth checking if such a system is in place for your business before approaching any lenders.
  • Bank requirements. Banks may have some form of criteria your business must meet to qualify for financing. Some financial institutions may prefer to work with businesses representing well-established brands that have a profitable history.
  • The interest rate. Not only do you need to consider the interest rate that applies to your franchise loan, but also whether it’s 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 you’re 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.
  • 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.

What are lenders looking for?

  • Profit potential. Your business plan should show that your franchise is likely to succeed. The stronger your business’s potential, the less risky your application will appear to lenders. If you want to open a franchise with an established company, point to a strong brand and preexisting customer base to assure lenders that your products will sell.
  • Experience. Have you worked with a franchise before? Have you ever owned or co-managed a business? If lenders see that you’re familiar with what it takes to make a business work and have experience working with successful enterprises, it reassures them that you know what you’re walking into and will avoid making detrimental mistakes.
  • Financial responsibility. Lenders will look at how well you manage your personal finances as an indicator of how well you’ll manage your franchise’s finances. If you have a history of paying back debts, building up savings and investments, keeping a low debt-to-income ratio and avoiding missed or late payments, then lenders will likely have more confidence in your ability to manage a business successfully.

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 in your name.
    Examples of assets include:

    • Cash
    • Personal savings
    • Equity in your home
    • Equity in another business
    • Vehicles you own (whether financed or paid off)
    • Expensive artwork or jewelry
    • Stocks, bonds, GICs and similar investments
    Examples of liabilities include:

    • Credit card debt
    • Amount owing on your mortgage
    • Car loans
    • Student loans
    • Personal loans
    • Outstanding bills
    • Overdrawn bank accounts
  • 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.
  • A business plan. Your business plan details how you intend to make your business profitable and includes:
    • An executive summary summarizing what your business is all about and what makes it competitive.
    • Product information explaining what you intend to sell including distinctive features of your goods/services as well as advantages and disadvantages.
    • Market research showing what customers you’re targeting, how you intend to win over these customers and who your competitors are.
    • A sales plan with details on how you will increase your market share and any promotional activities you’ll engage in.
    • Financial details showing how much your business needs, how the money will be spent, how you’ll price your products and what you expect to earn (a financial forecast).

It’s essential that you’re organized and 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.

Bottom line

Opening up a franchise is a huge undertaking requiring a lot of time and effort. Once you’ve found a franchise company you want to work with, look for a reputable lender and review your financing options. Make sure you fully understand the repayment terms, and avoid unnecessary debt by borrowing only what you actually need.

Learn more about financing the following businesses:

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