Written By: Gouri Ghosh

The popularity of franchising is increasing rapidly in India. If it would be food, retail or any other service related franchise all gaining popularity in India. Investors are choosing franchises instead of starting any business from scratch. A franchise provides a well tested model for making investors journey smoothly.

Any investors who want to start a franchise always think about the funds. Even a small-scale franchise business requires investments. However, you're not alone in this journey, and there is hope for financing your franchise business in India using various options.

This blog post is a detailed guide on the cost of franchise, various ways of financing a franchise business, the amount of loans you could receive, and tips on increasing your chances of approval.

How Much Does the Franchise Business Actually Cost?

Before looking out for loans and finances to buy a franchise business, you must clearly understand how much capital you will require to invest. And it is not just the cost, it is also the understanding of various components of the cost structure.

Some Key Components of Total Cost Structure

Initial Cost

 The cost is incurred at the time of buying a franchise from the organization or company. Mostly, it is a one-time payment.

Costs for Setting Up an Outlet

 This includes costs for setup, interiors, furnishing, equipment, marketing, and other expenses incurred at the time of setting up the unit.

Costs of Working Capital

 This is the capital required to operate the business for the initial period of 3–6 months. During this period, the unit does not generate consistent revenue; hence, you need to manage your business expenses.

Royalties and Other Monthly Payments

 Most franchisors ask for a monthly royalty fee or take a percentage of the revenue.

Why is this important

If you fail to calculate the full cost of your investment, you may:

• Borrow an amount that is lower than needed
• Lack of money during the initial period
• Have challenges handling your business

So you need time to understand total investment

Can you Finance in a Franchise in India?

Yes.  Financing a franchise in India is possible these days, owing to the various banking and NBFC institutions, as well as government schemes, available to those wanting to enter into franchising agreements.

It must be noted that obtaining a loan isn’t an easy feat. Credit institutions always need to be certain that your business idea is viable, and you’ll be able to repay the funds. Hence, some crucial elements have to be verified by lenders.

What Lenders Look For?

Your Credit Score

A score exceeding 700 gives a significant boost and may result in favorable interest rates.

Your Business Plan

Provides an outline of how your franchise will run and generate revenue.

Reputation of Franchise Brands

Established brands tend to carry less risk, which means lenders will see them favorably.

Your Financial Situation

Influences your ability to secure a loan greatly.

Personal Contribution

 The lenders typically require you to make personal investments (usually around 20–30%).

Collateral (depending on the circumstances)

 For larger amounts, the lenders could request collateral such as real estate or fixed deposits.

Professional or Business Experience

 Professional experience in the same domain raises the likelihood of the lenders accepting your loan application.

Franchise Location

 A great business location would increase your chance of being accepted.

Business Cash Flow Analysis

 It is necessary for the lenders to be sure that your business can make enough revenue to pay back the loan.

By satisfying most of these criteria, your chances of obtaining funds for purchasing a franchise in India become significantly higher.

Loan Eligibility Criteria

The Best Financing Options for Franchise Purchasers in India

With knowledge of expenses and qualification criteria, let us now explore the many alternatives for arranging finance for a franchise venture. The positive aspect is that you do not need to depend on only one choice, you have the option to select from several depending on your personal preference.

Bank Loans

When discussing financing for franchises, banks are the most conventional and trustworthy choice . For franchise applicants with a respectable financial background, banks are normally the first choice to consider for funding.

Benefits Offered:

• Business loans are available at banks to aid you in establishing your franchise venture.
• There are options for term loans that help in covering costs such as interior design, furniture, and other equipment.
• Banking institutions provide working capital loans that enable you to handle your day-to-day expenses, including rent, salaries, and inventory costs.

Points to Remember:

• Collateral could be required from you, particularly if you have taken a large loan amount.
• Interest rates are low compared to other modes, thus decreasing costs incurred.
• The process for approval takes longer since banks conduct thorough background verifications.

Advantages:

• Interest rates remain comparatively low, hence facilitating repayment of the loan.
• The repayment schedule is known well beforehand.
• They are secure and reliable financing institutions.

Disadvantages:

• The approval process could take some time.
• Eligibility conditions are quite stringent in nature.

For a stable form of finance for purchasing a franchise in India, bank loans come highly recommended.

Government Schemes

For entrepreneurs that are embarking on their journey as a startup in India, government schemes are extremely useful in setting up a franchise. The main purpose of such schemes is to promote small businesses and ease their financial burdens.

Advantages:

• The interest rate will be relatively low, which will decrease the burden of your loans.
• Some schemes come with subsidies, which means you may even get a free loan.

Best For:

• Investors who want to invest for 1st time in any franchise
• Franchise owners who have a limited budget for financing their franchise.
• Entrepreneurs who lack a sound financial background.

Qualifications:

• Basic business registration documents must be there.
• You need to prepare a business plan.
• Some other criteria might depend upon your line of business.
• One of the most efficient means of getting finance.

This is one of the best ways to get affordable financing for a franchise business, especially if you’re just starting.

NBFCs

NBFCs have become increasingly popular, particularly among those looking for speedy financing for acquiring a franchise without complications.

Reasons for Choosing NBFCs:

• The loan sanction process is very fast. Bank takes lots of time.
• In the eligibility process have very low restriction
• The document submission process is direct it not take much time

They make for a good choice if you have an imperfect credit record.

Disadvantages:

• The interest rates are generally higher, meaning higher repayment costs.
• Loan duration can be shorter, resulting in larger EMI amounts.

If speedy and hassle-free finance for your franchise acquisition is required, NBFCs can be a viable solution.

Franchise-Specific Financing

Some franchise brands realize that getting finances can be difficult for investors, so they facilitate this aspect. It can be really helpful, particularly if you lack experience in business.

They Could Help You With:

• Some brands offer financing within their brand, meaning that they help you out with part of your finances.
• Often, these brands have collaborations with financial institutions, so the whole process of borrowing money from them becomes smooth.
• Sometimes, they help you prepare all necessary documents and file an application with them.

It Will Be Useful Because:

• Firstly, approval will be easier due to your collaboration with the known and trusted brand by the lender.
• The process will go faster due to the same reason.
• Furthermore, you will receive more professional assistance than you would manage without.

It is especially beneficial for novices seeking a suitable franchise in India.

Personal Financing

There are many individuals who begin their franchise venture in India through their own money. It is one of the easiest methods that an individual can employ since he/she doesn’t have to fully rely on the loan.

Sources:

• The person’s own savings can be used for financing the venture.
• Fixed deposits or investments that can be easily converted into money can also be considered.
• Family members and friends can provide the required funding.
• Selling of personal assets such as jewelry, properties, or vehicles can help.

Risk:

• Your own money is put at stake in this case; hence, proper planning is needed.
• The venture may take some time to develop, and this can impact personal finances.
• On the other hand, using your money will reduce the loan amount and hence reduce the burden.

Types of Loans for Franchise

Alternative Funding

There are not many alternative sources available; however, they are increasing slowly in India. They would be very effective if you have an idea that shows potential.

Sources:

• Investors ready to put money into your innovative business ideas.
• Business associates who could provide joint investment and involvement.
• Crowdfunding, which is where different people make small donations online.

Appropriate For:

• A franchise idea that is able to grow rapidly.
• Innovative business ideas.
• People ready to share ownership or profit.

They would assist you in getting funds to buy a franchise, provided you have innovative and growth potential.

Franchise Financing Options Comparison

How Much Loan Can Be Obtained?

When you look for financing for buying a franchise in India, one important thing to understand is that you usually won’t get 100% funding from lenders.

Common Case Study

• In general, a franchise loan may cover 50-80% of the total cost of the franchise, depending on individual circumstances.
• You are required to contribute 20-50% of the capital from your personal funds, referred to as the margin money.

How Much Loan?

• Let’s suppose the franchise you choose is worth 20 lakhs. Then, in such a case, you would be able to obtain an amount ranging between 12-16 lakhs as a loan from a lender.
• In this way, you will need to raise another 4-8 lakhs from personal funds.

Reasons Behind This

• One reason why lenders follow this approach is that they wish to see your investment in the business.
• In other words, by making your personal contribution, you increase your chances of obtaining a loan.
• On the other hand, you will become more committed while running a franchise in India.

Documents Needed for Franchise Finance

In case you wish to finance a franchise, you will have to provide certain basic documents. The presence of these documents in advance will definitely save your time and prevent any sort of delay.

Documents That Are Required

• You will require identity proof in the form of an Aadhaar or PAN Card.
• You need to furnish address proof in the form of an electricity bill, rent agreement, or even your passport.
• Income proof or IT return statements will be necessary.
• Bank statements will give details regarding your financial transactions.
• A business plan is a document that helps in explaining your business model and its revenue generation process.
• The franchise agreement will confirm that you are indeed associated with the brand.
• Financial forecasts will provide an idea about your revenues and costs.

All these documents play an important role in providing franchise finance in India.

Steps to Increase Your chances of Approval

You only need to do a few things.

Basic Steps:

• Keep up a high credit rating as it indicates your ability to repay loans.
• Pick out a reputable brand for the franchise as lenders will be more secure.
• Have a business plan that highlights what you intend doing.
• Demonstrate that you have experience working or doing businesses.
• Contribute your share of funds to show your commitment.

By doing all this, it becomes very easy for you to get finance for your franchising business.

What  Mistakes investors should Avoid

These are some common mistakes committed by most investors:

• Undervaluing the total investment required
• Relying only on loans to fund the venture
• Failing to account for hidden expenses
• Not evaluating different loan choices

Selecting a franchise without considering return on investment

Avoid such blunders, and you will have a smooth ride.

Read more: Best funding options before starting a franchise business in India

Conclusion

Starting a franchise is  a great opportunity for investors. And funding is not a very difficult thing. In India different kinds of loan options are available. Choose the right loan and keep all documents prepared. That keeps your journey more smooth.

FAQs

1. Is there an option for 100% loan for franchise in India?

No, since most finance providers cover only 50%-80% of the total cost.

2. What is the best mode to obtain finances for the franchise?

Bank loans are one possibility, but there are also other ways like government schemes or NBFCs.