Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Are Using Crowdfunding for Expansion
Transcript
- Lucas: Luna, I want to talk about a funding source that most franchisees don't think about first — but increasingly should. Luna: Crowdfunding? Because I've seen a handful of operators go that route, but it still feels fringe. Lucas: Right. And it's actually not as fringe as it was five years ago. Thanks to the JOBS Act of 2012, and specifically the updates in 2021 that raised the cap on Regulation Crowdfunding, franchisees can now raise up to five million dollars a year from non-accredited investors. Luna: Five million — that's real money. That's enough for several new units in most systems. Lucas: Exactly. And it's happening. I came across a case last month — a Smoothie King franchisee in Birmingham, Alabama. He'd been operating two locations for about four years, wanted to expand to five. He went to banks, got offered a loan at prime plus three with a personal guarantee. Didn't love the terms. Luna: So he turned to crowdfunding instead? Lucas: He used a platform called MainVest — which specializes in franchise and restaurant deals. Ran a Reg CF round, raised 350,000 dollars at a fixed nine percent interest note. No personal guarantee. And here's the interesting part: 80 percent of his investors were existing customers. Luna: That changes the dynamic completely. Now your lenders are also your regulars. Lucas: It's a double-edged sword, but he leaned into it. He offered a free smoothie per month for a year to every investor. Cost him maybe 12 dollars per person per year. For 150 investors, that's under 2,000 dollars. Cheap marketing, essentially. Luna: And those customers now have a financial stake in his success. They're going to bring friends, post about it online. Lucas: Exactly. So let's back up and define the flavors here, because people hear 'crowdfunding' and think Kickstarter for cool gadgets. In franchise finance, there are three main types. Luna: Rewards-based, debt-based, and equity-based. I've seen all three used. Lucas: Start with rewards — that's the Kickstarter model. A franchisee might offer free product or merch in exchange for a pledge. It works for one-off unit openings, but it's hard to scale beyond maybe 50,000 dollars. It's not really investment, it's pre-sales. Luna: Then debt crowdfunding — which is what the Smoothie King guy did. Platforms like Honeycomb Credit or MainVest facilitate a loan from multiple investors. The franchisee pays interest, typically 8 to 12 percent, and the loan is structured as a note. No equity given up. Lucas: And equity crowdfunding — where investors get a piece of the business. This is newer and more complex. Under Regulation Crowdfunding, you can sell equity to non-accredited investors. But then you have to manage a cap table with potentially hundreds of small shareholders. Luna: Which creates reporting burdens. Annual audited financials, investor communications, right of first refusal issues. Lucas: Right. So most franchisees I've talked to prefer the debt route. They keep full ownership, and the interest rate is often comparable to — or even better than — a bank loan if you factor out origination fees and personal guarantees. Luna: But the platform takes a cut. MainVest charges a 5 percent success fee on funds raised, plus a 2 percent annual servicing fee. Lucas: That's worth knowing. On a 350,000 dollar raise, that's 17,500 upfront. Still cheaper than a bank's legal and underwriting costs in many cases. Luna: And you also get the marketing halo. Which brings us back to the Birmingham example. Lucas: If these conversations have moved your work forward in some small way, listener support is what keeps this show ad-free and independent. You can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the signal strong. Luna: Yeah, and it genuinely helps us avoid chasing ad revenue that would color the topics we choose. Lucas: So back to the Smoothie King case — he used the 350,000 as a down payment on three new locations, then secured SBA loans for the rest. That leveraged structure is actually the smart part. Luna: Because the crowdfunding filled the gap the SBA wouldn't cover. Typically an SBA 7 requires 10 to 20 percent equity injection from the borrower. Lucas: Right. And many franchisees don't have that much liquid cash sitting around. So crowdfunding becomes the equity injection. The bank gets comfortable seeing the borrower has skin in the game — even if that skin came from 150 small investors. Luna: Are there any franchise systems that explicitly ban this? I know some franchisors restrict passive ownership. Lucas: Good question. Most franchise agreements require that the franchisee — meaning the operating entity — be controlled by a designated individual or group. If you sell equity to outsiders, you risk violating that clause. But debt crowdfunding, where investors have no ownership or control, usually passes muster. You'd want a franchise attorney to review your specific agreement. Luna: And what about disclosure? When you raise under Reg CF, you have to file a Form C with the SEC, which includes financial statements, business plan, risk factors. Lucas: That's the part that scares some franchisees. Your financials become public. If you're not comfortable with that, debt crowdfunding on a platform that uses a simple note — not a public offering — might avoid that. Honeycomb Credit, for example, uses a direct private placement that doesn't require SEC filing if done correctly. Luna: So there's nuance. Let's talk about a case where it went wrong. Lucas: I know one: a franchisee of a quick-service burger brand in Texas tried to raise 500,000 via equity crowdfunding. He overpromised on growth projections — 20 percent annual revenue growth for five years — and when the pandemic hit, he missed every number. His investors got angry, started a Facebook group demanding their money back. He couldn't give it because the money was spent. He ended up selling the units at a loss. Luna: That's the reputational risk. With a bank, you default and they repossess. With 200 individual investors, they post bad reviews and tell everyone they know. Lucas: Exactly. So the advice is: raise only what you need, use debt not equity unless you're ready for shareholders, and be conservative with projections. Your crowd is also your customer base — you don't want to burn them. Luna: Let's tie it to numbers. What percent of franchise funding is currently coming from crowdfunding? Lucas: Hard to pin down exactly, but platforms like MainVest and Honeycomb have facilitated over 50 million dollars combined in franchise capital since 2020. That's still a drop in the bucket compared to SBA lending, which does about 30 billion a year in franchise loans. But the growth rate is fast — MainVest says their franchise volume doubled year over year in 2025. Luna: And the types of franchises that attract crowdfunding? Not all are equal. Lucas: Consumer-facing brands with strong local loyalty do best. Jimmy John's, Smoothie King, Anytime Fitness, The UPS Store — these are businesses people already know and use. A franchise that makes industrial cleaning chemicals? Harder to get the local community excited. Luna: So if you're a franchisee of a recognizable brand with a growth plan and a solid credit profile, crowdfunding is a viable option. If you're in a B2B service, you might struggle. Lucas: And there's also the timing angle. Right now in mid-2026, bank lending for small business has tightened a bit after the regional banking stress of 2024. So alternative sources like crowdfunding are becoming more attractive by default. Luna: Plus the Fed rate is still elevated — prime is around 8.5 percent. Crowdfunding debt at 9 or 10 percent doesn't look bad compared to that. Lucas: Right. So to wrap: if you're a franchisee looking to expand and you have a local customer base, consider running a small Reg CF or debt crowdfunding raise. It can fill the equity gap, build customer loyalty, and give you more favorable terms than a bank. But go in with eyes open on the disclosure and investor relations side. Luna: And maybe start with a test raise of 50,000 dollars to learn the process before scaling to 500,000. Lucas: Solid advice. I think we'll see more franchisees treating their customer base as a capital pool in the next few years. The tech is getting easier, and the regulation is stable now. Luna: Makes you wonder if the traditional franchise lending model will have to adapt. Lucas: It already is. Some banks now ask franchisees if they've considered crowdfunding as a co-source. That's a shift from five years ago.