5 Common Mistakes Franchisees Make When Financing Their Business

Financing a franchise is a significant undertaking, and it’s easy for both first-time and even experienced franchise owners to slip up during the funding process. A misstep in financing can cost you money, time, or even jeopardize your entire business. The good news is that by learning from others’ mistakes, you can avoid common pitfalls and set yourself up for success. In this post, we’ll discuss five common mistakes franchisees make when financing their business – and how you can avoid them. Whether you’re gearing up to buy your first franchise or looking to expand, keeping these points in mind will help you secure funding more smoothly and on better terms.

Mistake #1: Not Exploring All Your Financing Options

One of the biggest mistakes is limiting yourself to a single financing option without researching alternatives. Many new franchisees either assume their only choice is a bank loan, or they go straight to a familiar source (like tapping home equity or asking one family member) and stop there. In reality, there are many financing avenues available, and each has its pros and cons. Failing to shop around could mean you miss out on a solution that fits your needs better.

Consider the range of possibilities: traditional bank loans, SBA-backed loans, franchisor financing programs, equipment leasing, partnerships, investors, rollover for business startups (using retirement funds), crowdfunding, and loans from friends or family – to name a few. Each option has different requirements and costs. For example, some franchisors offer in-house financing or arrangements with preferred lenders to help new franchisees. These might cover things like the franchise fee or equipment at attractive rates – but if your franchisor doesn’t offer this, you’ll need a bank or alternative lender. Perhaps a home equity loan could provide low-interest capital, or an SBA loan could offer a longer term and smaller down payment.

The pitfall is focusing on just one source and not comparing. You don’t want to commit to a high-interest short-term loan if you could qualify for a lower-interest SBA loan, for instance. Or conversely, you might assume an SBA loan is the only way and overlook that maybe a franchisor’s lending program is faster and just as affordable for your particular case.

How to avoid this mistake: Do your homework on all financing options available to you. Talk to your franchisor about any financing assistance or preferred lenders they recommend. Speak with your bank and at least a couple of other lenders (including non-bank lenders who specialize in franchise financing). Consider consulting a franchise financing broker who can present multiple options. Think creatively – perhaps a combination of sources could work (for example, an SBA loan for the bulk of the cost plus equipment leasing for the costly kitchen hardware, if you’re opening a restaurant). By shopping around and comparing offers, you’ll ensure you choose the financing that best fits your situation. Remember, just as you might compare different franchise opportunities before picking one, you should compare financing deals before signing on the dotted line.

Mistake #2: Waiting Too Long to Secure Financing

Another common error is leaving the financing process until the last minute. It’s understandable – the excitement of choosing a franchise, finding a location, or negotiating the franchise agreement can overshadow the mundane task of securing funds. Some franchisees assume they can wrap up financing quickly after everything else is in place. Unfortunately, delaying your search for financing can lead to major problems.

The issue: Depending on the financing option, it can take anywhere from a couple of weeks to several months to get approval and funding. For example, an SBA loan application might take 6-8 weeks (or more) to go through underwriting, approval, and closing. If you start the loan process too late, you might miss critical deadlines – such as the date your franchisor expects you to pay the franchise fee or secure your location. Rushing at the last minute might also force you to accept a less-than-ideal loan because you don’t have time to negotiate or shop around.

When financing is an afterthought, you may find your back against the wall trying to get quick money. Last-minute loans can come with higher interest rates or unfavorable terms. Or worse, you might lose the opportunity: we’ve seen cases where franchise candidates lost their franchise territory or had to delay store opening by months because their financing wasn’t lined up in time.

How to avoid this mistake: Start the financing process early – as soon as you seriously commit to a franchise opportunity. Even better, get pre-qualified. Many lenders can pre-qualify you for a franchise loan based on your financial profile and the concept you’re investing in. This not only gives you confidence that you’ll be able to fund your investment, but it also identifies any potential hurdles while you still have time to address them.

Ideally, once you’re in discovery days or finalizing a franchise agreement, you should already be working on your loan application or other financing arrangements. Allow plenty of lead time for things like underwriting, site appraisals (if real estate is involved), legal reviews, and so on. By planning ahead, you turn financing into a streamlined part of your startup timeline rather than a fire drill. As a bonus, when you secure financing early, you can focus on other aspects of launching your franchise (like training and marketing) without the cloud of uncertainty over funds. Remember the adage: “Dig your well before you’re thirsty.” In franchising, secure your financing before you desperately need it. It will save you stress and possibly money, too – because you won’t be pressured into taking subpar terms out of desperation.

Mistake #3: Underestimating How Much Funding You Need

Many eager franchise owners budget just enough to cover the obvious startup costs – and not a penny more. They figure if the franchise disclosure document says the initial investment ranges up to $300,000, they’ll try to get $300,000 and not think beyond that. Unfortunately, this approach can leave a business undercapitalized. A very common mistake is underestimating the true amount of capital (and cash cushion) required to not only open the franchise but keep it running through the ramp-up period.

When you’re planning your franchise, it’s not just the franchise fee and build-out that cost money. There are many costs beyond the initial franchise fee that new franchisees must cover, such as equipment, inventory, grand opening marketing, licenses, insurance, and professional fees. On top of that, you need working capital – money for hiring staff, paying rent and utilities, replenishing inventory, and general operating expenses until the business becomes self-sustaining. It’s common for franchisors to recommend a minimum amount of liquid capital or working capital reserve (often they say at least 3-6 months’ worth of expenses). For example, many franchisors and experts advise having at least six months of operating expenses on hand as working capital. This is because most franchises are not immediately profitable; it may take months to build a customer base and reach break-even.

The danger of underestimating: If you only secure the bare minimum to open the doors, any unexpected expense or slower-than-expected sales can put you in a cash crunch. We’ve seen franchisees scramble to inject personal funds or take on high-interest credit card debt later because they ran out of money to pay bills in the critical first year. Running out of cash can quickly snowball – if you can’t pay vendors or employees, your business will suffer and potentially fail even though it might have succeeded with a proper cushion.

How to avoid this mistake: Aim for more funding than just the minimum startup costs. Build a detailed budget that includes all costs to open and operate for at least 6-12 months. It’s wise to secure financing for a buffer above your expected needs. If the franchisor estimates $50,000 working capital, consider raising perhaps $75,000 or $100,000 for cushion. It’s often said among franchise financing professionals: “It’s better to borrow a little too much than too little.” If you end up with extra funds, you can always prepay your loan or invest in additional marketing to grow faster. But if you borrow too little, going back to the lender for more is tough (or not possible) once the loan is closed.

When in doubt, talk to existing franchisees of the brand about their ramp-up experience. Did they need extra cash? Were there hidden costs? Their insights can help inform your budget. Also, add a contingency line in your budget (some experts suggest adding 10% contingency on top of everything). This ensures you have a safety net for the unknown unknowns.

In summary, set yourself up for success by adequately capitalizing your franchise. Secure enough funding to cover the business if it operates at a loss for a few months. Not having to constantly worry about making next month’s payroll will allow you to focus on growth and reaching profitability. As the saying goes, “hope for the best but plan for the worst.” If the worst doesn’t happen, you’ll just be in a stronger financial position.

Mistake #4: Not Seeking Advice from Experts and Peers

Financing a franchise can be a complex endeavor, especially if you’re new to the world of small-business loans and investments. A mistake some franchisees make is trying to navigate it entirely on their own and not seeking advice from others who have been through the process. Pride or the feeling that “I’ve got this” can prevent you from tapping into valuable insights that could save you money or headaches.

Why this is a mistake: Franchise financing isn’t just numbers on a page; there are strategies and nuances that seasoned franchise owners, financial advisors, or even the franchisor’s team might know. By not talking to current franchise owners in your system (or other systems), you might miss learning about financing programs they leveraged, or pitfalls they encountered with certain lenders. Who better to ask about the journey than those who have already financed a franchise? Existing franchisees can offer candid advice on what worked for them and what they would do differently. Maybe a fellow franchise owner tells you that a particular bank really understands the business model and gave them a great deal – that’s intel you wouldn’t get if you don’t ask around.

Similarly, not engaging with financial professionals (like an accountant or a franchise financing consultant) can be an error. These experts can help you interpret loan terms, ensure you’re not taking on debt you can’t afford, and optimize your financial structure for tax or accounting purposes. They might also help project your cash flow under different scenarios, so you know how much debt service is prudent.

How to avoid this mistake: Leverage your network and professional resources. During your due diligence phase, ask your franchisor to connect you with some existing franchisees – then have honest conversations about how they financed their business. Don’t be afraid to ask questions like “What was the biggest challenge in getting your loan?” or “Would you recommend your lender?” Most franchise owners are friendly and happy to share tips with someone about to join their franchise family.

Additionally, involve a knowledgeable financial advisor or even your attorney when reviewing financing offers. Sometimes loan documents have clauses (like prepayment penalties or liens) that you might gloss over – an expert eye can catch those. Organizations like SCORE or SBDC (Small Business Development Centers) often have mentors who can guide you for free on financing and business planning. Use those resources.

Remember, asking for advice is a sign of wisdom, not weakness. In fact, franchising itself is built on the idea of not doing it alone – you’re buying into a proven system with support. Financing should be approached with the same mindset: get the support and knowledge you need. By learning from others and getting expert input, you can avoid common financing traps, negotiate better terms, and enter your franchise venture with confidence in your financial foundation.

Mistake #5: Ignoring the Fine Print and True Cost of Financing

The final mistake to guard against is not fully understanding the loan terms or the true cost of the financing you choose. In the rush to get funded, a franchisee might accept a loan without scrutinizing the interest rate, fees, and conditions – only to be surprised later by higher costs or restrictive covenants.

Common oversights include:

•Accepting a High Interest Rate Without Question: Perhaps you went with an easy-to-obtain online loan, but did you calculate how much extra you’ll pay in interest over the years compared to a bank loan? A difference of a few percentage points can cost tens of thousands of dollars over the life of a loan.

•Not Noticing Fees or Penalties: Some loans have origination fees, packaging fees, or even prepayment penalties (though standard SBA loans typically avoid prepayment fees for terms under 15 years). If you didn’t read the fine print, you might owe a fee for paying off the loan early, or there could be late payment fees, etc.

•Collateral and Personal Liability Details: We mentioned personal guarantees earlier – ensure you know what you’re pledging. Is your spouse also required to sign a guarantee? Is your house collateral? Ignoring these details won’t make them go away, and you need a plan for protecting your assets.

•Loan Covenants: Some financing agreements (especially larger loans) might have conditions like maintaining a certain debt-to-equity ratio, or not taking on additional debt without permission. Breaching these covenants can lead to default, so don’t ignore them.

How to avoid this mistake: Read every line of your loan agreement and ask questions about anything you don’t understand. It’s often helpful to have your lawyer review the final loan documents. Before signing, have the lender explain the key terms: What is the interest rate? Is it fixed or variable? What is the payment amount and schedule? What fees are charged? If it’s an SBA loan, many terms are standard, but still double-check. For instance, confirm if there’s a prepayment penalty (SBA 7(a) loans over 15-year term have a declining prepayment penalty in the first 3 years; 504 loans also have a penalty). Knowing this will inform whether you should refinance later or not.

Also, compare the Annual Percentage Rate (APR) of different loan offers, not just the nominal interest rate. The APR accounts for fees and gives you a clearer comparison of cost. One loan might have a slightly higher interest but no fees and flexible terms, which could be better than a seemingly low-interest loan loaded with fees.

Another tip: If you have multiple financing components (say an equipment lease and a loan), consider the combined effect on your cash flow. It’s easy to sign each agreement in isolation and later realize the monthly payments together are a heavier burden than you expected.

By being diligent and detail-oriented at the start, you can save yourself from expensive surprises. Remember that financing is not just about getting the money, but getting it on terms that won’t hinder your business. The right financing should empower your franchise to grow; the wrong financing could siphon away your hard-earned profits unnecessarily.

Final Thoughts

Financing your franchise is arguably as important as choosing the right location or hiring the right manager – it’s part of the bedrock on which your business will stand. By avoiding these common mistakes – not exploring options, not procrastinating financing, raising sufficient capital, seeking good advice, and understanding your loan terms – you put yourself in a much stronger position as a franchise owner.

Every franchise journey is unique, but the lessons learned by those who came before can guide you. Be proactive, ask questions, and approach financing with the same diligence you applied when selecting a franchise concept.

At Liberty Franchise Lending, we’ve seen the good, the bad, and the ugly of franchise financing. Our mission is to help you be among “the good” – those franchisees who secure the right funding and start their business on solid financial footing. Let our experience be your guide. We’ll help you explore all viable financing options, plan your funding needs with plenty of cushion, and navigate the loan process from start to finish. Our experts will ensure you fully understand your financing terms and avoid costly mistakes.

Are you ready to finance your franchise the smart way? Contact Liberty Franchise Lending for a one-on-one consultation. We’ll review your franchise goals and budget, connect you with lender options, and coach you through a successful financing strategy. Don’t leave your dreams to chance – let’s build your franchise future on a rock-solid foundation together!